An investor in the 28 percent tax bracket is trying to decide which of two bonds to select: one is a 5.5 percent U. S. Treasury bond selling at par; the other is a municipal bond with a 4.25 percent coupon, which is also selling at par. Which of these two bonds should the investor select? Why?

Answer 1

Interest on U.S. Treasury bonds is taxed at 28%. Interest on municipal bonds is not taxed.

Do the math to figure out which is the better buy.