Question

Explain corporate bond interest in terms of cost of capital versus investor yields. Also, explain the municipal bond interest in terms of investor yields.

Answer #1

Corporate bonds are taxable in the hands of the investor when he receives interest or sells it for profit. On the other hand cost of capital for a firm is the coupon rate paid to the investors after deducting the taxation rate. Ex. A bond issued with a coupon rate of 10%, and tax rate of 30%, has an after tax cost of 10% *(1-30%) =7%. On the other hand the investor yield for the same will be based on his tax rate. If the investor is in a tax bracket of 10%, the investor yield is 10%*(1-10%) = 9%.

In case of municipal bonds, they are tax free for both the issuing entity and the investor. Hence the cost of capital and investor yield will be same i.e. 10% as in our example above.

Explain corporate bond interest in terms of cost of capital
versus investor yields. Also, explain the municipal bond interest
in terms of investor yields.

Please discuss corporate bond interest in terms of cost of
capital versus investor yields. Also, discuss municipal bond
interest in terms of investor yields.

Please discuss corporate bond interest in terms of cost of capital
versus investor yields. Also, discuss municipal bond interest in
terms of investor yields.
N.B
please discuss substantially

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.

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 for part a, and b
Suppose the interest rate on a taxable corporate bond is 4
percent while a municipal, tax exempt bond has an interest rate of
3 percent, and they are similar in every other way.
a. Assuming the income tax rate is 30 percent, calculate the
after tax interest rate on the corporate bond. Is it higher or
lower than the after tax return on the municipal bond?
b. What is the income tax rate that...

A municipal bond pays interest rate of 4%. A corporate bond of
similar risk and maturity pays interest rate of 5%. An investor
with a marginal tax rate of 30% will
a. Choose the municipal bond
b. Choose the corporate bond
c. Be indifferent between the two bonds
d. Invest 50:50 in the two bonds
The following data pertain to Debry Company for 2017 and 2018.
The company reported net income of $120,000 during 2018.
Depreciation expense was $25,000. Calculate...

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

Investor A has just sold a ten-year $10,000 corporate bond to
Investor B for $8,500. Investor A purchased the bond four years ago
for $9,500. The bond coupon rate is 8 percent per year paid
annually and Investor A has just received the dividend for year
4.Investor B has a MARR of 10% per year compounded semi-annually.
Will the return on the corporate bond meet the Investor B’s
MARR?

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