An investor in the 28 percent tax bracket is trying to decide which of two bonds to purchase. One is a corporate bond carrying an 8 percent coupon and selling at par. The other is a municipal bond with a 5½ percent coupon, and it, too, sells at par. Assuming all other relevant factors are equal, which bond should the investor select?

Question

15-11-2019
Business

contestada

An investor in the 28 percent tax bracket is trying to decide which of two bonds to purchase. One is a corporate bond carrying an 8 percent coupon and selling at par. The other is a municipal bond with a 5½ percent coupon, and it, too, sells at par. Assuming all other relevant factors are equal, which bond should the investor select?

Respuesta :

Otras preguntas

Which two principles have directed the foreign policy of the United States since World War II? A. cold war and deterrence B. collective security and deterrence

Which of the following was a reform movement in the early 1800s A public safety reform B education reform C food purity reform D election reform PLEASE HELP M

During the early to mid-1700s, the British policy of salutary neglect toward the American colonies contributed to a decline in colonial manufacturing the declin

The designer dressed them in black and teal costumes. Determine the case and function of the underlined pronoun. objective; direct object possessive; adjective

Select all that apply. The four main Allies in World War I were _____. Spain Austria-Hungary England France United States China Russia

In general, you expect the platform of a political party to. A. Lead to a national convention. B. Guide the political issues of the party's candidate. C. Consis

Determine the kinetic energy of a 1000kg roller coaster car that is moving with a speed of 20.0m/s

Which of the following was NOT a goal of the first stage of the French Revolution? a. to abolish serfdom b. to substantially reduce the power of the church c. t

John Marshall's 1803 decision in Marbury v. Madison A. found in favor of Marbury. B. was repudiated by Thomas Jefferson. C. established the principle of judici

beritop1089 beritop1089 · Answer 1 · 2019-11-27T07:25:46+01:00

Answer:

Explanation:

If a coupon paying bond is selling at par value, it means that the yield to maturity (YTM) is equal to the coupon rate.Therefore, these bonds have the following YTMs;

Pretax;

Corporate bond's YTM = 8%

Municipal bond's YTM = 5.5%

With regard to taxes, corporate bonds interests are not tax-exempt whereas municipal bond interests are.

Therefore,

After tax YTM = ; Pretax rate(1-tax)

Corporate bond = 0.08(1-0.28) = 0.0576 or 5.76%

Municipal bond ; will remain the same = 5.5%

The investor should select the corporate bond as it offers a higher after tax yield than the Municipal bond.