In a scenario with a 28% federal bracket and 6% state bracket, which investment would yield the highest after-tax income?

In a scenario with a 28% federal bracket and 6% state bracket, which investment would yield the highest after-tax income?

• A. 6% municipal bond from your state
• B. 6.5% Treasury bill
• C. 7% U.S. Treasury note
• D. 7.5% Corporate bond

Answer: (C)

Understanding after-tax return means looking at how taxes affect each investment’s interest. In this scenario, municipal bond interest is tax-exempt at the federal level and, since it’s in your state, typically also exempt from state taxes. That makes its after-tax yield equal to its stated yield: 6%. Taxable investments carry the federal tax on interest, and the state tax on interest as well (for the corporate and government securities). A 7% U.S. Treasury note is taxed only at the federal level, so its after-tax yield is 7% × (1 − 0.28) = 5.04%. A 6.5% Treasury bill has the same federal tax treatment, giving 6.5% × (1 − 0.28) = 4.68% after tax. A 7.5% corporate bond’s interest is taxed at both federal and state levels, totaling 34%, so its after-tax yield is 7.5% × (1 − 0.34) = 4.95%. Therefore, the investment yielding the highest after-tax income is the U.S. Treasury note.

Understanding after-tax return means looking at how taxes affect each investment’s interest. In this scenario, municipal bond interest is tax-exempt at the federal level and, since it’s in your state, typically also exempt from state taxes. That makes its after-tax yield equal to its stated yield: 6%.

Taxable investments carry the federal tax on interest, and the state tax on interest as well (for the corporate and government securities). A 7% U.S. Treasury note is taxed only at the federal level, so its after-tax yield is 7% × (1 − 0.28) = 5.04%.

A 6.5% Treasury bill has the same federal tax treatment, giving 6.5% × (1 − 0.28) = 4.68% after tax.

A 7.5% corporate bond’s interest is taxed at both federal and state levels, totaling 34%, so its after-tax yield is 7.5% × (1 − 0.34) = 4.95%.

Therefore, the investment yielding the highest after-tax income is the U.S. Treasury note.