Which is the better return for the investor on an after-tax basis? Please answer either corporate or municipal Information from prior: Consider the decision to purchase either a five-year corporate bond or a five-year municipal bond. The corporate bond is an 8.5% annual coupon bond with a par value of $1,000 and a yield to maturity of 9.0%. The municipal bond has an annual coupon of 6.5%, a par value of $1,000, and a yield to maturity of 6.75%.

Which is the better return for the investor on an after-tax basis? Please answer either corporate or municipal Information from prior: Consider the decision to purchase either a five-year corporate bond or a five-year municipal bond. The corporate bond is an 8.5% annual coupon bond with a par value of $1,000 and a yield to maturity of 9.0%. The municipal bond has an annual coupon of 6.5%, a par value of $1,000, and a yield to maturity of 6.75%.

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter12: Investing In Stocks And Bonds

Section: Chapter Questions

Problem 7FPE: An investor in the 22 percent tax bracket is trying to decide which of two bonds to select: one is a...

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Consider the decision to purchase either a five year corporate bond or a five year municipal bond. The corporate bond has a 13% annual coupon with a par value of $1000 with a current yield of 11%. The municipal bond has 11% annual coupon and a par value of $1000 that is currently yielding at 9%. Which of the two bond will be more beneficial to you. Assume that your marginal tax rate is 30%.
You are trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are the same and you are in the 28% tax bracket, which bond should you choose and why?
Suppose your company needs to raise $40.8 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 5.8 percent, and you’re evaluating two issue alternatives: a 5.8 percent semiannual coupon bond and a zero coupon bond. Your company’s tax rate is 23 percent. a. How many of the coupon bonds would you need to issue to raise the $40.8 million? How many of the zeroes would you need to issue? (Do not round intermediate calculations. Round your coupon bond answer to the nearest whole number, e.g., 32 and your zero coupon bond answer to 2 decimals, e.g., 32.16.) b. In 25 years, what will your company’s repayment be if you issue the coupon bonds? What if you issue the zeroes? (Do not round intermediate calculations and enter your answers in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.) c. Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the firm’s aftertax…
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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 the two bonds hould the investor select? Why?
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