Which of the following is true about municipal (muni) bonds?

The interest paid on muni bonds is subject a higher than average federal income tax.

Generally, investors prefer corporate bonds over municipal bonds.

The interest paid on muni bonds is subject a lower than average federal income tax.

The interest paid on muni bonds is not subject to federal income tax.

Suppose Kate is in the 25% tax bracket. She considers purchasing two bonds, a corporate bond, which pays a before-tax interest rate of 11.5%, and a muni bond, which pays a 5% interest rate.

Complete the following table for the before- and after-tax yields on corporate and municipal bonds. (Note: Round your answers to the nearest hundredth.)

Yield	Corporate Bond	Muni Bond
Before tax
After tax

Suppose the before-tax yield on the corporate bond is 6.67%. Which of the following is true?

Kate will prefer the corporate bond over the muni bond.

Kate will be indifferent between the corporate bond and the muni bond.

Kate will prefer the muni bond over the corporate bond.