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 Bond interest will be offering the investor with the higher bond yield and they will be having a higher cost of capital as well because corporate Bond yields are mostly taxable in nature and they will be not offering the tax exemption so they will just be offering with the tax deduction on the interest payment like all bonds so there will be a higher bond yield received for investor and there will be a higher cost of capital for the corporates as these are not the risk free bonds as they are not backed by anyone.

When we will be considering the municipal Bond interest, it would be lower because municipal bonds are generally considered risk free bonds and hence the overall bond yield on municipal bonds will always be lower due to higher safety.