An investor is in the 28% tax bracket and lives in a state with no income tax. He is trying to decide which of 2 bonds to purchase. One is a 7.5% corporate bond that is selling at par. The other is a municipal bond with a 5.25% coupon that is also selling at par. If all other features of these bonds are comparable, which should the investor select? Why? Would your answer change if this were an in-state municipal bond and the investor lived in a place with high state income taxes? Explain.
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