Homework Answers
The pre-tax return on Walmart Bond = 7%
Effective return after 40% federal tax = 7% (1 - 0.4) = 4.2%
Effective return after 5% state tax = 4.2%(1 - 0.05) = 3.99%
The pre-tax return of the muni bond = 4%
Effective return after the state tax = 4%(1 - 0.05) = 3.8%
So, one should invest in Walmart Bond as the after-tax return is higher as compared to the muni bond.
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