Question

You are considering the purchase of one of two different bonds, a muni, which currently yields 6%, and a corporate, which currently yields 10%. If you are trying to maximize your return and you are in a 38% tax bracket, which of the following is true?

A) The muni bond has a better yield for you.
B) The corporate bond has a better yield for you.
C) The bonds have identical yields for you.
D) There is not enough information to determine which is a better yield for you.

Answer 1

B) The corporate bond has a better yield for you.

Step-by-step explanation:

Usually the holder of the Corporate Bond is required to pay taxes on his gains annually. Therefore, an investor in the 38% tax bracket would collect $10.00 on every $100 bond held, but after paying taxes of 38% would only keep $6.2. If the investor were to invest in municipal bonds, he would collect $6 for every $100 bond which is a lower yield when compared to the corporate bond.

Therefore, the corporate bond has a better yield for me.