6% is the equivalent tax-free rate for the corporate bond.
A corporate bond has a 6 percent interest rate. A municipal bond has a 4 percent interest rate.
Your marginal tax rate is 25%. A larger after-tax cash flow is offered by a municipal bond if your marginal tax rate is higher than 25%.
Currently, the equivalent tax-free rate (ETFR) is equal to 6 percent (1 - MTR) which equals 6 percent * (1 - 0.25) = 4.5 percent. Select a municipal bond if the real municipal rate is higher than 4.5 percent.
A corporation may issue a bond known as a "corporate bond" to raise funds for a variety of uses, including ongoing operations, mergers, and acquisitions, or business growth. It usually refers to debt instruments with a minimum one-year maturity that is longer-term in nature.
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