Suppose that an investor in the 40% marginal tax bracket is considering the purchase of either a tax-exempt muni that offers a yield of 2%, or a Treasury security of the same maturity that offers 3%.
Determine the equivalent taxable yield on the muni.
What is the yield ratio between the two securities?
Which bond should the investor buy?
Suppose the issuer of the muni buys insurance to back the muni but cuts the yield offered to 1.8% from 2%. If the muni is now considered as safe as a treasury security of the same maturity, which security should the investor buy?