Betty Forrester is 55 years old and wants to diversify her investment portfolio and must decide if she should invest in taxfree municipal bonds or corporate bonds. The tax-free bonds are highly rated and pay 5.25 percent. The corporate bonds are more speculative and pay 7.5 percent.

a. If Betty is in the 33 percent tax bracket, what is the taxable equivalent yield for the municipal bond?

b. If you were Betty, would you choose the municipal bonds or corporate bonds? Justify your answer.