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Practice CPA®CPA TCP Practice Exam 5Question 42

Easy1 markMultiple Choice

Area I: Individual Compliance and PlanningTCPIndividual TaxInvestments

CPA · Question 42 · Area I: Individual Compliance and Planning

A taxpayer is considering investing in a Municipal Bond yielding 3% or a Corporate Bond yielding 5%. The taxpayer's marginal tax rate is 35%. Which investment provides the higher after-tax return?

Answer options:

A.

Municipal Bond (3.0%)

B.

Corporate Bond (3.25%)

C.

They are equivalent.

D.

Cannot be determined.

How to approach this question

Calculate Tax Equivalent Yield or After-Tax Yield. After-Tax Corp = 5% * (1 - 0.35) = 3.25%. Compare to Muni (3%).

Full Answer

B.Corporate Bond (3.25%)✓ Correct

After-tax return on Corporate Bond = 5% * (1 - 0.35) = 3.25%. This is higher than the 3% tax-free return on the Municipal Bond.

Common mistakes

Comparing pre-tax yields directly.

Question 41 All questions Question 43

Practice the full CPA TCP Practice Exam 5

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