Problem:
Suppose you were an investor and you were considering whether to buy a corporate bond from Joe's Corporation or a Municipal Bond from the city of St. Louis. Joe's corporate bond has a yield of 7%. The St Louis city bond has a yield of 5%. The income from Joe's bond is taxable. The income from the St Louis city bond is tax-free.
Required:
If your effective tax rate is 30%, which bond would give you the higher after-tax yield?
Note: Explain all steps comprehensively.