Luke Heckman has asked you to analyze the following investment alternatives to determine the highest after-tax rate of return under the assumption that he is subject to a 32 percent marginal federal income tax and a 5 percent state income tax (disregard the AMT for this problem). Which bond should he purchase?

A corporate bond with a 7 percent pre-tax return.

An out-of-state municipal bond with a 5.75 percent pre-tax return.

An in-state municipal bond with a 5.5 percent pre-tax return.