Mr. G has $15,000 to invest. He is undecided about putting the money into tax-exempt municipal bonds paying 3.5 percent annual interest or corporate bonds paying 4.75 percent annual interest. The two investments have the same risk.
a. Which investment should Mr. G make if his marginal tax rate is 33 percent?
b. Would your conclusion change if Mr. G’s marginal tax rate is only 15 percent?