Consider a coupon bond with 15 years to maturity. The coupon rate is 8%, and the principal is 100. The marginal tax rate on interest income is 40%.
(a) If yield to maturity is 2%, with simple compounding, what is the bond price?
(b) At the 40% tax rate, would be the yield to maturity of an equivalent municipal bond?
(c) Which security under (a) and (b) above would be picked by a foreign investor who does not pay income tax in the United States?
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