Short Term municipal bonds currently offer yields of 4%, while taxable bonds pay 5%. Which gives you the higher after tax yield if your tax bracket is.
a. zero
b. 10%
c. 20%
d. 30%
a. taxable pays more after taxes (5%)
b. taxable pays more after taxes (4.5%)
c. they pay the same after taxes (4%)
d. municipal pays more after taxes in the 30% bracket
Thanks, I came up with the same answers except for c. I came up with 4% for the taxable and 5% for the municipal, can you show me the equation so I can see what I am doing wrong.
To determine which investment option provides a higher after-tax yield, we need to consider the tax implications for each scenario.
For a) zero tax bracket:
Since there is no tax liability, the after-tax yield for both short-term municipal bonds and taxable bonds would be the same. Therefore, the answer is a tie.
For b) 10% tax bracket:
In this case, the after-tax yield for taxable bonds would be reduced by 10% because of the tax liability. Let's calculate the after-tax yields for both options:
- Short-term municipal bonds: 4% (no tax liability)
- Taxable bonds: 5% - (5% * 10%) = 4.5%
Therefore, the after-tax yield for taxable bonds is higher at 4.5%.
For c) 20% tax bracket:
Following the same calculation method, the after-tax yields would be:
- Short-term municipal bonds: 4% (no tax liability)
- Taxable bonds: 5% - (5% * 20%) = 4%
In this case, the after-tax yield for short-term municipal bonds is higher at 4%.
For d) 30% tax bracket:
The after-tax yields would be:
- Short-term municipal bonds: 4% (no tax liability)
- Taxable bonds: 5% - (5% * 30%) = 3.5%
Here, the after-tax yield for short-term municipal bonds is higher at 4%.
So, to summarize:
a) Tie between short-term municipal bonds and taxable bonds.
b) Taxable bonds offer a higher after-tax yield at 4.5%.
c) Short-term municipal bonds offer a higher after-tax yield at 4%.
d) Short-term municipal bonds offer a higher after-tax yield at 4%.