Data:

Three friends, Kimberly, Natalie, and Clinton, are from Nevada, where there is no state income tax. They have asked you to determine the equivalent taxable yield on a municipal bond. This municipal bond is from the same state as your friends, and is exempt from state and local taxes. The bond’s current yield is 3.75 percent with five years left until maturity. Kim is in the 15-percent tax bracket, Natalie is in the 28-percent tax bracket, and Clinton is in the 35-percent tax bracket. Calculate the equivalent taxable yield for your three friends.

Calculations:

Assuming a similar AAA corporate bond yields 5.0 percent, which of your friends should purchase the municipal bond?