Mr. G has $15,000 to invest. He is undecided about putting the money into tax-exempt municipal bonds paying 3.5 percent annual interest or corporate bonds paying 4.75 percent annual interest. The two investments have the same risk. a-1. Assume Mr.G's marginal tax rate is 32 percent. What is his after-tax yield on the municipal bonds? a-2. What is his after-tax yield on the corporate bonds? a-3. Which investment should Mr. G make? b-1. Assume Mr. G's marginal tax rate is 12 percent. What is his after-tax yield on the municipal bonds? b-2. What is his after-tax yield on the corporate bonds? b-3. Which investment should Mr. G make?

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jepessoa jepessoa · Answer 1 · 2020-09-19T02:56:00+02:00

Answer:

a-1. Assume Mr.G's marginal tax rate is 32 percent. What is his after-tax yield on the municipal bonds?

3.5%

interest from municipal bonds is not taxed by the federal government

a-2. What is his after-tax yield on the corporate bonds?

4.75% x (1 - 0.32) = 3.23%

interest form corporate bonds is taxed as ordinary income

a-3. Which investment should Mr. G make?

Mr. G should invest in municipal bonds since they yield a higher after tax rate

b-1. Assume Mr. G's marginal tax rate is 12 percent. What is his after-tax yield on the municipal bonds?

3.5%

interest from municipal bonds is not taxed by the federal government

b-2. What is his after-tax yield on the corporate bonds?

4.75% x (1 - 0.12) = 4.18%

interest form corporate bonds is taxed as ordinary income

b-3. Which investment should Mr. G make?

Mr. G should invest in corporate bonds since they yield a higher after tax rate