Answer:
We should invest in municipal bond to have profit.
Step-by-step explanation:
- taxable bonds: 8.9 percent
- municipal bond: 7.15 percent
- marginal tax rate: 21 percent.
So we need to identify the after-tax or equivalent tax exempt yield on the taxable bond:
8.9% ( 1 - 21%)
= 0.089*0.79
= 0.0703 = 7.03%
and it is smaller than the yield of municipal bond (7.15%) so we should invest in municipal bond to have profit.