Calculate the​ after-tax return of​ a(n) 5.69 ​percent, 20-year,​ A-rated corporate bond for an investor in the 10 percent marginal tax bracket. Compare this yield to​ a(n) 4.82 ​percent, 20-year,​ A-rated, tax-exempt municipal​ bond, and explain which alternative is better. Repeat the calculations and comparison for an investor in the 35 percent marginal tax bracket.
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Part 1
The​ after-tax return of the 5.69​%, ​20-year, A-rated corporate bond for an investor in the 10​% marginal tax bracket is 
  
5.12​%. ​ (Round to two decimal​ places.)
Part 2
Compare this yield to the 4.82​%, ​20-year, A-rated,​ tax-exempt municipal bond and explain which alternative is better.  ​(Select the best answer​ below.) 
A.
The after dash tax yield of 5.12 % for the corporate bond is a better alternative than the 4.82 % tax dash free municipal bond at the 10​% tax rate.
Your answer is correct.B.
The 4.82 % tax dash free municipal bond is a better alternative than the after dash tax yield of 5.12 % for the corporate bond at the 10​% tax rate.
Part 3
The​ after-tax return of the 5.69​%, ​20-year, A-rated corporate bond for an investor in the 35​% marginal tax bracket is 
  
enter your response here​%. ​ (Round to two decimal​ places.)

Let's solve each part step by step:

### Part 1: After-tax return of the corporate bond for a 10% marginal tax bracket
The formula for after-tax return is:

\[
\text{After-tax return} = \text{Pre-tax return} \times (1 - \text{Tax rate})
\]

For the corporate bond:
- Pre-tax return = 5.69%
- Tax rate = 10% (0.10)

So, the after-tax return is:

\[
5.69\% \times (1 - 0.10) = 5.69\% \times 0.90 = 5.12\%
\]

Thus, the after-tax return for an investor in the 10% tax bracket is **5.12%**.

### Part 2: Comparison between the corporate bond and the municipal bond
Now, compare the after-tax return of the corporate bond (5.12%) with the tax-exempt municipal bond (4.82%).

Since the municipal bond is tax-exempt, its yield of 4.82% is not reduced by taxes. So, for an investor in the 10% tax bracket:

- **Corporate bond after-tax yield** = 5.12%
- **Municipal bond yield** = 4.82%

Clearly, the corporate bond offers a higher after-tax return, so:

**Answer:**
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.

### Part 3: After-tax return of the corporate bond for a 35% marginal tax bracket
Using the same formula, we calculate the after-tax return for an investor in the 35% tax bracket:

\[
\text{After-tax return} = 5.69\% \times (1 - 0.35) = 5.69\% \times 0.65 = 3.70\%
\]

So, the after-tax return for an investor in the 35% tax bracket is **3.70%**.

### Comparison for the 35% tax bracket:

- **Corporate bond after-tax yield** = 3.70%
- **Municipal bond yield** = 4.82% (still tax-exempt)

In this case, the municipal bond provides a better return. Hence, the tax-exempt municipal bond is the better option for an investor in the 35% tax bracket.

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Do you want further details or have any questions?

Here are some related questions:
1. What are the general tax advantages of municipal bonds?
2. How does the length of the bond impact returns in different tax brackets?
3. What role does credit rating play in bond selection?
4. How does inflation affect bond yields over time?
5. How would returns change if the investor's tax bracket fluctuates?

**Tip:** Always consider both the tax impact and the bond's credit quality when comparing investment options.

Calculate the after-tax return of a(n) 5.69 percent, 20-year, A-rated corporate bond for an investor in the 10 percent marginal tax bracket. Compare this yield to a(n) 4.82 percent, 20-year, A-rated, tax-exempt municipal bond, and explain which alternative is better. Repeat the calculations and comparison for an investor in the 35 percent marginal tax bracket.

Learn how to calculate the after-tax return of a 5.69% corporate bond for investors in the 10% and 35% marginal tax brackets. Compare the result with a 4.82% tax-exempt municipal bond, and determine the best investment option at different tax rates. Suitable for Grades 10-12.

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