Municipal Bond Tax Equivalent Yield

John, a high-income investor in the 35% federal tax bracket, is considering purchasing a tax-free municipal bond with a yield of 3.5%. He is also evaluating a taxable corporate bond with a yield of 5.0%.

Which of the following statements is correct regarding the tax-equivalent yield of the municipal bond?

1. The tax-equivalent yield of the municipal bond is 5.38%, making it more attractive than the corporate bond.
2. The tax-equivalent yield of the municipal bond is 3.5%, meaning the corporate bond is the better investment.
3. The tax-equivalent yield of the municipal bond is 2.28%, making the corporate bond the better choice.
4. Municipal bonds are always preferable for high-income investors, regardless of tax-equivalent yield calculations.