Question

An investor is in the 28 percent federal tax bracket. For this investor, a municipal bond paying 4 percent interest is equivalent to a corporate bond paying ________ interest.

Answer #1

Assuming municipal bonds are tax free

Interest on corporate bonds are taxable

Hence to earn a required rate of interest of 4% corporate tax bond should provide a post tax rate of interest of 4%

Hence after tax rate of return required from corporate bonds=4%

or pre tax rate of return *(1- tax rate)=4%

or pre tax rate of return*(1-28%)=4%

or pre tax rate of return =4%/72%= 5.5556%

An investor is in the 28 percent federal tax bracket. For this investor, a municipal bond paying 4 percent interest is equivalent to a corporate bond paying 5.5556% interest.

An investor in the 35 percent tax bracket may purchase a
corporate bond that is rated A and yields 6.0 percent. The investor
may also buy an A-rated municipal bond with a 3.9 percent yield.
Why may the corporate bond be preferred? (Assume that the terms of
the bonds are the same.)

An investor is attempting to decide between the purchase of a
tax-free municipal bond or a corporate bond. She is in the 32% tax
bracket (rate). A municipal bond yields 2.2% interest and a
corporate bond yields 3.1% interest. Which should she purchase?
Please state the reason.

Assume you are in the 20 percent tax bracket and purchase a 7.6
percent municipal bond. Calculate the taxable equivalent yield for
this investment.

A 4.25 percent coupon municipal bond has 10 years left to
maturity and has a price quote of 108.75. The bond can be called in
five years. The call premium is one year of coupon payments. What
is the bond's taxable equivalent yield for an investor in the 28
percent marginal tax bracket? (Assume interest payments are paid
semiannually and a par value of $1,000.)

A 3.25 percent coupon municipal bond with a par value of $5000
has 12 years left to maturity and has a current price of $4937.50.
The bond can be called in five years. The call premium is one year
of coupon payments. What is the bond's taxable equivalent yield for
an investor in the 35 percent marginal tax bracket? (Assume
interest payments are paid semi-annually and a par value of
$5,000.) Hint: Calculate the yield of this municipal bond (and...

A tax-exempt municipal bond pays 5.4% coupon interest annually
while a similar taxable bond is paying 7.5% annually. Taxpayers in
the _____ % marginal tax bracket and above would be better off
investing in the tax-exempt bond.
b) 15
d) 28
a) 10
c) 25

An investor is considering whether to invest in a general
obligation municipal bond and a Treasury bond. The annual interest
rate on the municipal bond is 4% and that on the Treasury bond is
5%. Assume that both bonds do not carry any risk. Which bond would
the investor prefer if his marginal tax rate on interest income is
10%.
The investor is indifferent between the two bonds
The Treasury bond
The municipal bond
Not enough information is provided

A tax-exempt municipal bond has a yield to maturity of 3.91%. An
investor, who has a marginal tax rate of 33.00%, would prefer and
an otherwise identical taxable corporate bond if it had a yield to
maturity of more than ____%.
Round to 2 decimal places.

You can invest in either a corporate bond which
yield 4.85%, or a municipal bond (of equal risk) which yield
3.43%. Which investment should you
choose?
Ignore state income taxes:
A.
Your marginal personal tax rate is 35%
B. Your marginal personal tax rate is
14%
Please show your calculation for each investor
from (Muni to Corporate bond, and once again, from Corporate to
Muni bond equivalent interest rates). In other
words,
your calculations will cover two different
situations for parts...

An investor purchases a 30-year municipal bond for $960. The
bond’s coupon rate is 8 percent and, it still had 16 years
remaining until maturity. If the investor holds the bond until it
matures and collects the $1000 par value from the municipality and
his marginal tax rate is 34 percent, what will be his (effective)
yield to maturity?

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