A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 4.8 percent yield to maturity and a similar risk corporate bond that offers a 6.55 percent yield. Which bond will give the client more profit after taxes

The municipal bond will give the client more profit after taxes because it has a higher equivalent yield (8.06%) compared to that of the corporate bond (6.55%)

Explanation:

Here, we are to compare a municipal bond to a corporate bond and determine which of the two will give the client more profit after taxes.

The first thing to calculate here is the equivalent taxable yield of the municipal yield.

Mathematically, we employ a mathematical approach approach here;

Equivalent taxable yield = Municipal yield/(1-tax rate)

From the question, we can identify that the tax rate is 28%

28% = 28/100 = 0.28

The municipal yield = 4.8%

Inputing these into the equation;

Equivalent taxable yield = 5.8/(1-0.28) = 5.8/0.72 = 8.06% approximately

Now comparing this value to the value of the corporate bond, we can see that the municipal bond offers a better profit after tax since it has a higher equivalent yield

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