Question

You can invest in taxable bonds that are paying a yield of 9.50 percent or a municipal bond paying a yield of 7.75 percent. If your marginal tax rate is 21 percent, which security bond should you buy?

Answer 1

Calculate the after tax yield of the taxable bonds and compare that
with the yield for the municipal bonds.
Yield for taxable bonds Rb = .095
After tax yield for taxable bonds = Rb*(1-tc)
where tc is the marginal tax rate.
After tax yield for taxable bonds = .095*(1-.21)
After tax yield for taxable bonds = .07505
The after tax yield for taxable bonds = 7.505%.
The yield on municipal bonds is 7.75%.
Since municipal bonds are paying a higher yield after comparing with
taxable bonds, you should buy the municipal bonds.