Question - Assume that a taxpayer has a marginal tax rate of 33%. How much of the income from a corporate bond earning interest at a 7% rate does the taxpayer keep after taxes are paid on the interest (i.e., what is the adjusted interest rate after taxes)?
If a taxpayer in the 28% tax bracket has the opportunity to invest in a taxable corporate bond that pays 4% interest or to invest in a tax-exempt municipal bond that pays 3% interest (assuming that all other elements of the two bonds, e.g., risk, are equal), which investment would generate the greater after-tax yield?