Charlie Nelson is 50 years old and wants to diversify her investment portfolio and must decide if she should invest in tax-free municipal bonds or corporate bonds.

The tax-free bonds are highly rated and pay 3.25 percent. The corporate bonds are more speculative and pay 5 percent.

1. If Ms. Nelson is in the 32 percent tax bracket, what is the taxable equivalent yield for the municipal bond?

2. If you were Ms. Nelson, would you choose the municipal bonds or corporate bonds? Justify your answer.