FGR Bond Investment Essay Example | Topics and Well Written Essays - 500 words

FGR Bond Investment - Essay Example The bond that is a tax-free with a high credit rating and a 4.7% taxable equivalent yield is much safer investment than that taxable bond that pays 5 % with a low credit rating. As a result, advisable that one does not need to buy tax-exempt bonds for him just to get the tax-free income if he is in a lower tax bracket. With the DES corporate bond, the yield that the investor receives is taxable at 30%.With the FGR municipal bond, the yield is tax-free. As a result, in order to compare the two options, one has to figure out the taxable-equivalent yield of municipal bond. First, one has to find out what he keeps from taxable investments, which, in this case, is 70% or .70 of the taxable yield. Since the investor pays 30% of every dollar in taxes, he gets to keep 70%. 12.9% (rounded up from 12.8571) is the taxable-equivalent yield of 9% corporate bond if you are in the 30% tax bracket. It is, as a result, obvious that this is more than the FGR’s municipal bond taxable rate of 7%. That is; one can conclude that if you were to earn 12.9% and pay 30% on the interest, one would end up with 9% after-tax yield. As a result, Beth who is an investor in this case in the 30% tax bracket would choose Options 1 for it is because the higher taxable-equivalent yield would give the most appealing income stream. The importance of municipal bonds is that, the interest received from it is free from federal income taxes thus making it free from state income taxes. As with municipal bonds, everything comes down to taxes. If one is not benefiting from tax-exemption, he will earn more with taxable bonds. However, based on one’s tax bracket, the tax-free municipal bond that has a lower yield may offer a higher after-tax return compared to the higher-yielding taxable Treasury