How to calculate the muni bond

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Reference no: EM13274000

Suppose you were an investor and you were considering whether to buy a corporate bond from Joe's Corporation or a Municipal Bond from the city of St. Louis. Joe's corporate bond has a yield of 7%. The St Louis city bond has a yield of 5%. The income from Joe's bond is taxable. The income from the St Louis city bond is tax-free. If your effective tax rate is 30%, which bond would give you the higher after-tax yield?

I know that the corporate bond would yield 7.00%(1-.30) = 4.9%, but I would like to learn how to calculate the muni bond. Thanks!

 

Reference no: EM13274000

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