You are trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal b
ond that pays an annual coupon rate of 4.75%. Assuming all other factors are the same and you are in the 28% tax bracket, which bond should you choose and why?
A.
Corporate bond because the after tax yield is 6.25%.
B.
Corporate bond because the after tax yield is 4.5%.
C.
Municipal bond because the equivalent taxable yield is 6.3%.
D.
Municipal bond because the equivalent taxable yield is 6.6%.
E.
You will be indifferent between the two because the after tax yields are the same.
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