P10-4 Problem An investment is in the 28% tax bracket and lives in a state with
ID: 2691257 • Letter: P
Question
P10-4 Problem An investment is in the 28% tax bracket and lives in a state with no income tax. He is trying to decide which of two bonds to purchase. One is a 7.5% corporate bond that is selling at par. The other is a municipal bond with a 5.25% coupon that is also selling at par. If all other features of these two bonds are comparable, which should the investor select? Why? Would your answer change if this were an in-state municipal bond and the investor lived in a place with high state income taxes? Explain.Explanation / Answer
Assume an investor is in the 31% marginal tax bracket. She is considering the purchase of either a 7.5% corporate bond that is selling at par or a 5.25% tax-exempt municipal bond that 3 is also selling at par. Given that the two bonds are comparable in all respects except their tax status, the investor should buy the:
A. Corporate bond, since it has the higher yield of 7.50%
B. Municipal bond, since the taxable-equivalent yield is 10.87%
C. Municipal bond, since its taxable-equivalent yield is 7.61%
D. Corporate bond, since its after-tax yield is higher
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.