1) Ye Yuan is in retirement and is considering investing in one of the following
ID: 2796665 • Letter: 1
Question
1) Ye Yuan is in retirement and is considering investing in one of the following two money market securities:
A Bank CD offering a quoted yield of 7.08%
A Massachusetts Municipal bond offering a quoted yield of 4.65%
Ye pays federal tax at the rate of 27% and tax to the state of Massachusetts (his state residency) of 7%.
Ye estimates that the Massachusetts municipal bond has a 1% chance of default, and that the bank CD has a 2% chance of default.
Because the quoted yield is before tax and credit risk adjustments, Ye is interested in determining which of these two bonds is best. How much more (or less) in yield does the Bank CD offer after adjusting for tax and credit risk? If the believe that the CD is best, then enter the differential as a positive number. If you believe the municipal is best, then enter the differential as a negative number.
Difference in yield = %_________
Place your answer as a percent without the percentage sign. For example, if your answer is zero point six three percent, then enter your answer as 0.63
2) Ye Yuan is in retirement and is considering investing in one of the following two money market securities:
A US Treasury Bill offering 6.89%
A Massachusetts Municipal bond offering 4.78%
Ye pays Federal tax at the rate of 26% and tax to the state of Massachusetts (his state residency) of 8%.
Ye estimates that the US Treasury Bill has zero risk of default, and that the Massachusetts municipal bond has a 1% chance of default.
Because the quoted yield is before tax and credit risk adjustments, Ye is interested in determining which of these two bonds is best. How much more (or less) in yield does the Treasury Bill offer after adjusting for tax and credit risk? If the believe that the Treasury Bill is best, then enter the differential as a positive number. If you believe the municipal is best, then enter the differential as a negative number.
Difference in yield = %________
Place your answer as a percent without the percentage sign. For example, if your answer is zero point six three percent, then enter your answer as 0.63
Explanation / Answer
1) Retun from CD BANK = 7.08% chances of default = 2% tax rate = 27% Return after tax 5.1684 Return from massachusetts = 4.65% tax rate = 7% Return after tax 4.3245 Chances of default = 1% With 1% of default the return is 4.3245% what is the expected return in the same bond with 2% default= +4.3245/101*102 Return from CD bank = 5.17% Change in yield = 5.17-4.37/4.37 18.30% 2) Retun from = 7.08% 6.89% chances of default = 0% tax rate = 26% Return after tax 5.0986 Return from massachusetts = 4.78% tax rate = 8% Return after tax 4.3976 Chances of default = 1% Yield difference .=4.396-5.0986/4.396 15.98%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.