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Nina [5.8K]
3 years ago
14

Joe is considering 2 similar bonds, with the only difference that: (1) a tax-exempt municipal bond promises a 5.625% annual retu

rn, (2) a taxable corporate bond promises a 7.5% annual return. If Joe's tax rate is 25%, which bond should he buy?
a. Either one, both have the same after-tax yield
b. Municipal bond, as it has a higher after-tax yield
c. Corporate bond, as it has a higher after-tax yield
d. Not enough information is given to answer the question
Business
1 answer:
Dahasolnce [82]3 years ago
6 0

Answer:

a. Either one, both have the same after-tax yield

Explanation:

we have to calculate the after tax return of the bonds:

after tax return of corporate bonds = bond yield x (1 - tax rate) = 7.5% x (1 - 25%) = 7.5% x 0.75 = 5.625%

since municipal bonds are not included as part of Joe's gross income, their after tax rate is equal to their yield = 5.625%

both bonds yield the same after tax return = 5.625%

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