The yield on a corporate bond is 10%, and it is currently selling at par. The marginal tax rate is 20%. A par value municipal bond with a coupon rate of 8.50% is available, Which security is a better buy? Also If the municipal bond rate is 4.25% and the corporate bond rate is 6.25%, what is the marginal tax rate, assuming investors are indifferent between the two bonds?
In order to decide which security is a better buy we should compare the after tax returns
The yield on the corporate bond is taxable and the return to ...
The solution explains how to evaluate investment is different bonds using the after tax yield