Q4: An investor has the choice of an AA-rated corporate bond with a yield of 6%

Question

Q4: An investor has the choice of an AA-rated corporate bond with a yield of 6% or an AA-rated muni yielding 4%.
Please complete the table and answer the questions below.

Q4: An investor has the choice of an AA-rated corporate bond with a yield of 6% or an AA-rated muni yielding 4%.
Please complete the table and answer the questions below.

If the investor has a marginal tax rate of 30%, which bond should he/she select? If the investor has a marginal tax rate of 35%, which bond should he/she select? Yield Bond Rating Municipal ? AA Corporate ? AA Investors' Marginal Tax Bracket (%) Municipal Yield (%) Corporate After-Tax Yield (%) Munis' Tax Equivalent Yield (%) Corporate Yield (%) 10% 0.00% ? ? 0.00% 15% 0.00% ? ? 0.00% 25% 0.00% ? ? 0.00% 28% 0.00% ? ? 0.00% 30% 0.00% ? ? 0.00% 33% 0.00% ? ? 0.00% 35% 0.00% ? ? 0.00% 40% 0.00% ? ? 0.00%

Explanation / Answer

At 30% Select munis

at 35% , select munis

tax rate Munis yield corporate after tax yield Munis tax equiv yied Corp yield 10% 4.00% 5.40% 4.44% 6% 15% 4.00% 5.10% 4.71% 6% 25% 4.00% 4.50% 5.33% 6% 28% 4.00% 4.32% 5.56% 6% 30% 4.00% 4.20% 5.71% 6% 33% 4.00% 4.02% 5.97% 6% 35% 4.00% 3.90% 6.15% 6% 40% 4.00% 3.60% 6.67% 6%

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