A taxable investor has a 40% marginal tax rate. The investor is choosing between two bonds: An A-rated corporate bond with a 4% coupon rate, or an A-rated municipal bond with a 2.5% coupon. Assume both bonds are priced at their par value.
a. Which bond offers the investor a more attractive yield?
b. What taxable yield on the corporate bond would make the investor indifferent between the 2.5% municipal bond and the corporate bond?