You are given the following three money market securities: A US T-bill offering
ID: 2651387 • Letter: Y
Question
You are given the following three money market securities:
A US T-bill offering a quoted yield of 6.75%;
A bank CD offering a quoted yield of 7.56%;
A MA Municipal bond offering a quoted yield of 4.25%;
You pay Federal tax at the rate of 32%, and the MA state tax at the rate of 6.25%. It is estimated that the US T-Bill has zero risk of default, the MA municipal has a 1.8% chance of default,and the back CD has a 2.3% chance of default. The quoted yield is before tax and credit risk adjustments, which of these three securities is best after adjusting for tax and credit risk?
Bank CD
T-Bill
MA Municipal
They are the same
cannot make decision
a.Bank CD
b.T-Bill
c.MA Municipal
d.They are the same
e.cannot make decision
Explanation / Answer
Federal State Risk Risk amount Expected Yield Tax Tax Balance percent Return US T-Bill 6.75 2.16 0.42 4.17 0% 0.000 4.17 Bank CD 7.56 2.4192 0.47 4.67 2.30% 0.107 4.56 MA Municipal Bond 4.25 1.36 0.27 2.62 1.80% 0.047 2.58 Answer : a.
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