3.22.2005

Q: Consider an investor with a marginal tax rate of 30%...

...If municipal securities yield 6% and a comparable corporate yields 7.5%, which is the better investment?

A: For an investment of $100, the municipal security will provide a yield of $6.00 and the corporate security will provide a yield of $7.50. But given the investor's tax bracket, the after-tax return on the corporate security will be 7.50 × 0.7 = $5.25.

The investor may want to consider other factors, however. Possible tax reforms may cause the tax benefits to be reduced. Plus illiquidity.

Category: C++ Quant > Debt

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