The Johnsons recently decided to invest in municipal bonds because their marginal tax rate is 40 percent. The return on municipal bonds is currently 3.5 percent and the return on similar taxable bonds is 5 percent. Compare the after-tax returns of the municipal and taxable bonds.
a. Which type of bond should the Johnsons select?
b. What type of bond should the Johnsons select if their marginal tax rate was 20 percent?
c. At what marginal tax rate would the Johnsons be indifferent between investing in either taxable or municipal bonds?