Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 7.20 percent. Bond B is a corporate bond that yields 10.00 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

Sally should select Bond A because its interest income is not taxable.

Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B.

Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B.

Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B.