You are an investor in the 34% marginal tax bracket. You are looking to invest some of your funds in a fixed income security. You see a Mecklenburg County municipal bond with a yield of 2.75%. The other bond you are considering is a Ford Motor Company corporate bond yielding 4.00%. On the basis of taxable equivalent yield, which bond would you choose?

Answers:

A. The municipal bond because its after-tax yield is higher

B. The municipal bond because its taxable equivalent yield is higher

C. The Ford bond because its after-tax yield is higher

D. The Ford bond because its taxable equivalent yield is higher