You are evaluating two investments that each require $1,000. One is a municipal bond that pays 9 percent interest annually. The interest is exempt from federal and state taxes. The other is a corporate bond that pays 11 percent interest, but its earnings are subject to 20 percent capital gains tax if kept for less than 12 months, and 15 percent capital gains tax if kept for more than 12 months.

1. Calculate

(a) Which bond provides the largest return?

(b) Does the situation change if you need to sell the bond before 12 months?

2. Compute by using spreadsheet software to create scenarios about the circumstances under which each investment gives a bigger return.