You are interested in investing some money in a bond issue and have several choices. The first is a corporate bond with a 6.4% yield to maturity. The second alternative is a Treasury bond that offers a 5.7% yield. The last alternative is a municipal bond priced at a yield to maturity of 4.0%. You are in a 40 % tax bracket. Name and show the formula you would use to determine which bond offers the most advantageous yield. Which bond should you invest in?

You are interested in investing some money in a bond issue and have several choices. The first is a corporate bond with a 6.4% yield to maturity. The second alternative is a Treasury bond that offers a 5.7% yield. The last alternative is a municipal bond priced at a yield to maturity of 4.0%. You are in a 40 % tax bracket. Name and show the formula you would use to determine which bond offers the most advantageous yield. Which bond should you invest in?

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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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?
If your primary goal is current yield, which one of these bonds is the wiser investment? Bond A: $1,000 corporate bond that pays 6 percent and has a current market value of $700; or Bond B: $1,000 corporate bond that pays 7.25 percent and has a current market value of $800?
A)calculate the value of a bond that matures in 12 years and has a 1000 par value . the annual rate is 8% and the markets required yield to marurity on a comparable risk bond is 12% b) what will be the value of the bond be if the payments are semi annual? c) explain the four relationships of a corporate bond.
A 10-year T-bond has a yield of 6%. A 10-year corporate bondwith a rating of AA has a yield of 7.5%. If the corporate bond hasexcellent liquidity, what is an estimate of the corporate bond’sdefault risk premium? (1.5%)
12.Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation. His broker quotes a price of $1,170. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 13 percent interest, and it has 18 years remaining until matu- rity. The current yield to maturity on similar bonds is 11 percent. Do you think the bond is overpriced? Do the necessary calculations. 22You are called in as a financial analyst to appraise the bonds of Olsen's Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate of 13 percent, which is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. There are 25 years to maturity. a. Compute the price of the bonds based on semiannual analysis. b. With 20 years to maturity, if yield to maturity goes down substantially to 8 percent, what will be the new price of the bonds?
An investment firm recommends that a client invest in bonds rated AAA, A, and B. The average yield on AAA bonds is 4%, on A bonds 6%, and on B bonds 11%. The client wants to invest twice as much in AAA bonds as in B bonds. How much should be invested in each type of bond if the total investment is $28,000, and the investor wants an annual return of $1,740 on the three investments? Question content area bottom Part 1 The client should invest $enter your response here in AAA bonds, $enter your response here in A bonds, and $enter your response here in B bonds
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%.
QUESTION 4 As an assistant of financial officer, you have to evaluate the following three investment alternatives: Alternative 1: A bond that pays 10% coupon on its par value in interest and matures in 12 years. For bond of this class, you believe that a 12% rate of return should be required. The price of the bond is RM920. Alternative 2: A preferred stock that pay a dividend of RM6, your required rate of return for the stock is 14%. The preferred stock is selling at RM40. Alternative 3: A common stock that recently paid a RM5 dividend, the company’s return on equity is 16% and the company keeps only 50% of the profits for reinvestment. The reasonable required of return is 18%. The stock is selling at RM50 b. Calculate the value of the preferred stock c. Calculate the value of common stock d. From the above calculation, which investment should you accept? Why?
QUESTION 4 As an assistant of financial officer, you have to evaluate the following three investment alternatives: Alternative 1: A bond that pays 10% coupon on its par value in interest and matures in 12 years. For bond of this class, you believe that a 12% rate of return should be required. The price of the bond is RM920. Alternative 2: A preferred stock that pay a dividend of RM6, your required rate of return for the stock is 14%. The preferred stock is selling at RM40. Alternative 3: A common stock that recently paid a RM5 dividend, the company’s return on equity is 16% and the company keeps only 50% of the profits for reinvestment. The reasonable required of return is 18%. The stock is selling at RM50 a. Calculate the value of the bond
10-4 Suppose that a bond has a yield to call (YTC) equal to 6.5 percent and a yield to maturity (YTM) equal to 6.3 percent. Explain the meanings of these numbers to bond investors. 10-5 Two investors are evaluating IBM’s stock for possible purchase. They agree on the expected value of D1 and on the expected future dividend growth rate. They also agree on the riskiness of the stock. One investor normally holds stocks for two years, and the other normally holds stocks for 10 years. On the basis of the type of analysis presented in this chapter, they should both be willing to pay the same price for IBM’s stock. Is this statement correct? Explain.
A municipal bond has a yield to maturity of 3.8 percent. What corporate bond yield would make an investor in the 29 percent tax bracket indifferent between two bonds, all else the same?