Question

Suppose that short-term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Which gives you the higher after-tax yield if your tax bracket is 30%

Answer 1

30%

Step-by-step explanation:

The computation of the after tax yield of the taxable bond in the case when the tax bracket is 30%

= rate × (1 - tax rate)

= 5% × (1 - 0.30)

= 5% × 0.70

= 3.50%

As we can see that the short term municipal bond is 4%

So this tax bracket should be chosen as the short term municipal bond gives higher after tax yield