An investor in the 28% tax bracket is trying to decide which of two bonds to...
An investor in the 28% tax bracket is trying to decide which of two bonds to select: one is a 7.4% U.S. Treasury bond selling at par; the other is a municipal bond with a 5.6% coupon, which is also selling at par. Which of these two bonds should the investor select?
Answer 1.- Municipal Bond or U.S treasury Bond
And why?
Homework Answers
US treasury bills are not taxed hence return on US treasury bond
=7.4%
Since Munis is sold at par, hence YTM =5.6%
After Tax return on munis =5.6%*(1-28%) =4.03%
Hence investor should select US treasury bond
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