You can invest your money in a taxable corporate bond paying 10% interest or a tax-free municipal bond paying 7% interest. Which would pay the higher after tax interest if you are in the 28% tax bracket?
To determine which investment would pay the higher after-tax interest, we need to calculate how much of the interest you would actually get to keep after taxes.
Let's start with the taxable corporate bond paying 10% interest. Since the interest from the corporate bond is taxable, you would owe taxes on that amount. In this case, since you are in the 28% tax bracket, 28% of the interest earned would need to be paid in taxes. Therefore, you would keep 100% - 28% = 72% of the interest earned.
On the other hand, the tax-free municipal bond pays 7% interest, which means you get to keep the full amount.
To calculate the after-tax interest for each investment, we multiply the interest rate by the portion of the interest we get to keep:
Taxable corporate bond: 10% x 72% = 7.2%
Tax-free municipal bond: 7%
As you can see, the after-tax interest rate for the taxable corporate bond is 7.2%, while the tax-free municipal bond has an after-tax interest rate of 7%. Therefore, in this scenario, the taxable corporate bond would pay a higher after-tax interest rate.