Ye Yuan is in retirement and is considering investing in one of the following two money market securities:
A Bank CD offering a quoted yield of 7.15%
A Massachusetts Municipal bond offering a quoted yield of 4.95%
Ye pays federal tax at the rate of 26% and tax to the state of Massachusetts (his state residency) of 9%.
Ye estimates that the Massachusetts municipal bond has a 1% chance of default, and that the bank CD has a 2% chance of default.
Because the quoted yield is before tax and credit risk adjustments, Ye is interested in determining which of these two bonds is best. How much more (or less) in yield does the Bank CD offer after adjusting for tax and credit risk? If the believe that the CD is best, then enter the differential as a positive number. If you believe the municipal is best, then enter the differential as a negative number.
Difference in yield =