Quiz: Q05 Time Remaining: 00:52:48 Submit Quiz This Question: 1 pt 2 of 5 (2 com

Question

Quiz: Q05 Time Remaining: 00:52:48 Submit Quiz This Question: 1 pt 2 of 5 (2 complete)This Quiz: 5 pts possible Suppose you pay 20 percent of your income in federal income taxes. Suppose a tax-exempt municipal bond pays 8 percent per year. What yield would you require on a corporate bond of the same default risk to make you indifferent between buying this bond and the municipal bond? The required yield on a corporate bond will have to bepercent. (Enter your response as a percentage rounded to one decimal place.)

Explanation / Answer

the requierd yeild for the corporate bond will be given by

x * ( 1 - tax rate ) = 8%

tax rate is 20%

x = 10%

thus at 10% of yield I will be indifferent between both.

Ans 2) expectation approach of term structure because here comparision happens between long term and short term securities.

Ans 3) It will be positively sloped due to increase in interest rate from short term to long term securities. Correct option is B.

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