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Which investment has the highest yield

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An investor from Ohio can invest $1,000 in the following investments:

(a) a municipal bond issued by the city of Columbus, Ohio with an interest rate of
5.5 percent;
(b) a corporate bond with an interest rate of 8 percent; or
(c) a preferred stock with a yield of 6 percent.

Assuming the investor's marginal tax rate is 50 percent, which investment would yield the largest return?

a. Corporate Bond
b. Municipal Bond
c. Preferred Stock
d. All would yield the same return
e. It is impossible to determine without knowing the tax rate for Ohio

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Solution Summary

The solution explains how to calculate the yields on different investment options

Solution Preview

We calculate the after tax yield on all the investments to select the one which is the best. We need to consider after tax return, since that is what the investor would get

a. ...

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