Municipal bonds are usually preferred by individuals in high income tax bracket. Assume that an investor is currently in 30 percent tax bracket. This investor has two alternative investment opportunities: A bond issued by XYZ Corp. that has a current yield to maturity of 9 percent or a Municipal bond issued by state of Massachusetts to fund construction of a student dorm. The Municipal bond yield to maturity at this time is 7%

- Which of these to alternative investments should be chosen?

- At what tax rate would this investor be indifferent between XYZ Corp bond and the Muni?

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