Assume a municipal bond has a yield of 6.25% and corporate bond of comparable maturity and credit rating has a yield of 8.0%. For investors in the 20% and 25% marginal tax brackets, state whether the muni, corporate or either is the best investment?
| Municipal bond yield = | 6.25% | |||||||||
| with marginal tax rate of 20% | ||||||||||
| corporate bond yield = | =8%*(1-20%) | |||||||||
| corporate bond yield = | 6.400% | |||||||||
| Since coporate bond yield after tax is higher than municipal bond yield therefore corporate bond is better choice | ||||||||||
| with marginal tax rate of 25% | ||||||||||
| corporate bond yield = | =8%*(1-25%) | |||||||||
| corporate bond yield = | 6.000% | |||||||||
| since municipal bond yield is higher than after tax corporate bond yield. Therefore, municipal bond is good choice | ||||||||||
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