Mable is a wealthy widow who has come to you for tax advice. She is in the 35 percent tax bracket. She has a choice between investing in a high-quality municipal bond paying 3.5 percent or a high-quality corporate bond paying 7 percent. From a tax standpoint, which investment would you advise her to make and why? Please show your work.

Income Tax Fundamentals 2020
38th Edition
ISBN:9780357391129
Author:WHITTENBURG
Publisher:WHITTENBURG
Chapter2: Gross Income And Exclusions
Section: Chapter Questions
Problem 21P: Vandell is a taxpayer in the 25 percent tax bracket. He invests in Otay Mesa Water District Bonds...
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Mable is a wealthy widow who has come to you for tax advice. She is in the 35 percent tax bracket. She has a choice between investing in a high-quality municipal bond paying 3.5 percent or a high-quality corporate bond paying 7 percent. From a tax standpoint, which investment would you advise her to make and why? Please show your work.

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After-tax return=Tax-free interest rate1 - the taxpayer's tax rate=3.5%1-0.35=5.38%

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