Karen is a wealthy retired investment advisor who is in the 35 percent tax bracket. She...
Karen is a wealthy retired investment advisor who is in the 35 percent tax bracket. She has a choice between investing in a high-quality municipal bond paying 5 percent or a high-quality corporate bond paying 7 percent.
a. What is the after-tax return of each bond?
Enter your answer as a percent, rounded to two decimal
places.
Tax-exempt municipal bond: _______%
Corporate bond:_________ %
Homework Answers
Tax-exempt municipal bond: 5%
Corporate bond: 7% x (1 - 0.35) = 4.55%
In 1913, when Congress questioned the constitutionality of taxing the interest earned on state and local government obligations after the Sixteenth Amendment was enacted, So there is no tax on interest earned a municipal bond.
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