Suppose you were an investor and you were considering whether to buy a corporate

Question

Suppose you were an investor and you were considering whether to buy a corporate bond from Joe's Corporation or a Municipal Bond from the city of St. Louis. Joe's corporate bond has a yield of 7%. The St Louis city bond has a yield of 5%. The income from Joe's bond is taxable. The income from the St Louis city bond is tax-free. If your effective tax rate is 30%, which bond would give you the higher after-tax yield?

I know that the corporate bond would yield 7.00%(1-.30) = 4.9%, but I would like to learn how to calculate the muni bond. Thanks!

Explanation / Answer

The muni bond is tax free so you don't have to calculate an after tax amount (unless it is subject to state taxes which it would be if you were out of state in a state that levied them).

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