To solve this problem, we need to calculate the after-tax yield for both a 10% and a 35% marginal tax bracket and compare them to the 4.82% yield on the tax-exempt municipal bond.

Part 1: After-Tax Return Calculation (10% Marginal Tax Bracket)

The after-tax return for a corporate bond is calculated using the formula:

$\text{After-Tax Return} = \text{Yield} \times (1 - \text{Tax Rate})$

Given:

• Corporate bond yield = 5.69%
• Tax rate = 10%

$\text{After-Tax Return} = 5.69\% \times (1 - 0.10) = 5.69\% \times 0.90 = 5.121\%$

So, the after-tax return for the corporate bond is approximately 5.12%.

Comparison at 10% Tax Rate

• After-tax return of the corporate bond = 5.12%
• Municipal bond yield (tax-exempt) = 4.82%

Since 5.12% (corporate bond) is greater than 4.82% (municipal bond), the corporate bond is a better alternative at the 10% tax rate.

The correct answer is: A. The after-tax yield of 5.12% for the corporate bond is a better alternative than the 4.82% tax-free municipal bond at the 10% tax rate.

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Part 2: After-Tax Return Calculation (35% Marginal Tax Bracket)

We will now repeat the calculation for an investor in the 35% tax bracket.

$\text{After-Tax Return} = 5.69\% \times (1 - 0.35) = 5.69\% \times 0.65 = 3.6985\%$

So, the after-tax return for the corporate bond is approximately 3.70%.

Comparison at 35% Tax Rate

• After-tax return of the corporate bond = 3.70%
• Municipal bond yield (tax-exempt) = 4.82%

At this tax rate, 4.82% (municipal bond) is greater than 3.70% (corporate bond), so the municipal bond is a better alternative at the 35% tax rate.

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Conclusion:

1. For an investor in the 10% tax bracket, the corporate bond is better.
2. For an investor in the 35% tax bracket, the municipal bond is better.

Would you like more details or have any questions about the process?

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Here are 5 related questions for further exploration:

1. How would changes in interest rates affect the comparison between these two bonds?
2. What are the risks associated with corporate bonds versus municipal bonds?
3. How does the tax-exempt status of municipal bonds vary across different states?
4. Can municipal bond yields be higher than corporate bond yields in any scenario?
5. What is the impact of inflation on long-term bond investments?

Tip: Always consider the tax implications when comparing investments to ensure you're comparing after-tax returns for an accurate picture.