A state issued muni bond offered at a coupon rate of 4% is preferred over a junk bond of 6% when a taxpayer's federal marginal tax bracket is 30% and their state is 5%. (The investor is a resident of the state the muni is issued in and is also exempt from state taxation.) True False
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- An investor in the 22 percent tax bracket is trying to decide which of two bonds to select: one is a 5.5 percent U.S. Treasury bond selling at par; the other is a municipal bond with a 4.25 percent coupon, which is also selling at par. Which of these two bonds should the investor select? Why?A municipal bond carries a coupon of 6.75% and is trading at par. What is the equivalent taxable yield to a taxpayer in a combined federal plus state 34% tax bracket?An investor is comparing the following two bonds: a bond from ABC Corp which pays an interest rate of 9 percent per year and a municipal bond which pays an interest rate of 7.9 percent per year. The investor is in the 22 percent tax bracket. Which bond will give the investor a higher after-tax interest rate and for which reason? a. The ABC bond because it pays a 9 percent interest rate, while the municipal bond only pays 7.9 percent. b. None of these is correct. c. The ABC bond because it pays an equivalent after-tax rate of 11.5 percent, while the municipal bond pays out an equivalent after-tax rate of 10.1 percent. d. The municipal bond because it pays an equivalent after-tax rate of 7.9 percent, while the ABC bond pays out an after-tax 7.02 percent interest rate. e. The municipal bond because it pays an equivalent after-tax rate of 7.9 percent, while the ABC bond pays out an equivalent after-tax rate of 2.0 percent.
- 1. Suppose the state of Indiana issued a tax-exempt bond to pay for student fees in its universities. The bond currently has a yield of 0.8 percent. 2. Suppose Mike is paying a marginal tax rate of 20% and Peter is paying a marginal tax rate of 30%. Calculate the equivalent taxable yields of this bond to both Mike and Peter. Mike: 0.8/(1-.2)=1 Peter: 0.8/(1-.3)= 2.67 3. Suppose that the yield on a Baa-rated corporate bond, a bond with the same credit rating as the state of Indiana, is 1.4 percent. Calculate the yield ratio between the tax-exempt bond vs the taxable bond, and briefly interpret what the yield ratio implies.Kelly Phillips, an investor who resides in Livingston NJ, has a marginal tax rate of 28%. If a NJ municipal bond has a coupon rate of 5.83% and a YTM of 5.53%, what is the equivalent pretax yield on a taxable bond? a. 7.68% b. 8.10% c. 4.20% d. 3.98% e. 5.94%Cookeville City Council is trying to issue a municipal bond that is tax free. A current taxable bond that has similar risk characteristics is traded at $1012.34. The taxable bond has 20-year maturity with semi-annual coupon payment at 7% annual coupon rate. If the tax rate is 25%, what is the annual coupon rate that the Cookeville City Council should provide on its municipal bond to equate its price to that of the taxable bond?
- An investor in the 22 percent tax bracket is trying to decide which of two bonds to select: one is a 5.5 percent U.S. Treasury bond selling at par, the other is a municipal bond with a 4.25 percent coupon, which is also selling at par. Which of the two bonds hould the investor select? Why?Curtis invests $800,000 in a city of Athens bond that pays 5 percent interest. Alternatively, Curtis could have invested the $800,000 in a bond recently issued by Initech, Incorporated that pays 7 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent. How much implicit tax would Curtis pay on the city of Athens bond?Curtis invests $250,000 in a city of Athens bond that pays 7 percent interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Incorporated that pays 9 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent. What is Curtis's after-tax rate of return on the city of Athens bond?
- If a 5 yr. AA- General Dynamics note is yielding a 35% tax bracket investor 7.56125% while a comparable maturity note from Philadelphia, Pennsylvania is yielding 4.8735%. If the inflation rate is 2.2765%, which bond would the investor prefer and why? If the marginal tax rate for the investor increases to 38.95%, which bond would the investor prefer? What is the critical tax rate?A 7-year municipal bond with a face value of $1,000 earns annual income of $480. Your marginal tax rate (including state and federal taxes) is 36%. What annual pretax income on a 7-year corporate bond of equal risk would provide you with the same annual after-tax income as the municipal bond?you invest in a municipal bond that pays a yield of 10%. If your marginal tax is 26%, what is the equIvalent yield on the taxable bond? (write your answer in percentage and round it to 2 decimal places)
