Question

mr. brown is in the 10-percent federal income tax bracket and wants to invest $8000 in interest-earning assests. Mr. Black is in the 35-percent bracket and wants to invest $15,000 . The current rate on a typical high-quality tax-exempt municipal bond is 5 percent and on a similar quality corporate bond is 6.5 percent. recommend investment

Answer 1

On the corporate bond, Mr. Black will earn and keep (0.65)*6.5% = 4.225% interest after taxes and Mr. Brown will earn and keep (0.90)6.5% = 5.85% interest after taxes.

The 5% muni is a better investment for Mr. Black, assuming comparable bond quality and maturity. The 6.5% corporate is a better investment for Mr. Brown.