To calculate: The tax bracket or the Marginal tax rate at which the investor will be indifferent between the taxable bond and tax-exempt bonds.
Introduction:
Marginal tax rate: Income of individual is taxable if it crosses the limit imposed by the Government. So, Government decides some tax brackets which consist of tax percentages which will be imposed on tax payers if they qualify the income range. This tax percentage are called Marginal tax rate.
Tax-exempt bond: An investor is given certain bonds stating the rate of interest payable to him for a fixed tenure. When a tax is not charged on the income of bond then it is called tax-exempt bond.
Taxable bond: When an investors receives some bonds which as taxable under the Income tax laws approved by the Government, then these are called taxable bonds.
Trending nowThis is a popular solution!
Chapter 2 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
- 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?arrow_forwardSuppose you invest in a municipal bond that pays a yield of 9%. If your marginal tax is 17%, what is the equivalent yield on the taxable bond?arrow_forwardIf the municipal bond rate is 6% and the corporate bond rate is 8%, what is the marginal tax rate, assuming investors are indifferent between the two bonds?arrow_forward
- Suppose you invest in a municipal bond that pays a yield of 4. If your marginal tax is 17%, what is the equvalent yield on the taxable bond? (write your answer in percentage and round it to 2 decimal places)arrow_forwardAn 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.arrow_forwardSuppose you invest in a municipal bond that pays a yield of 9%. If your marginal tax is 29%, what is the equivalent yield on the taxable bond? (write your answer in percentage and round it to 2 decimal places)arrow_forward
- 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?arrow_forwardIf the coupon rate on a bond is 8 percent and current market interest ratesare 6 percent, should this bond be selling at a premium or a discount?arrow_forwardMunicipal bonds are yielding 4.4 percent if they are insured and 4.7 percent if they are uninsured. Your marginal tax rate is 28 percent and the inflation rate is 1.645%. Your equivalent taxable yield on the insured bonds is _____ percent and on the uninsured bonds is _____ percent. How would your answers change if your marginal tax rate falls to 13.5% and the inflation rate increases to 2.0639%? What would happen to the YTM of the uninsured bond if negative news was announced resulting in a decline in its credit rating? What would happen to the YTM of the insured bond if it suddenly lost its insurance?arrow_forward
- If a P1,000 bond sells for P1,125, which of the following statements are correct? I. The market rate of interest is greater than the coupon rate on the bond. II. The coupon rate on the bond is greater than the market rate of interest. III. The coupon rate and the market rate are equal. IV. The bond sells at a premium. V. The bond sells at a discount. a. I and IV b. I and V c. II and IV d. II and Varrow_forwardBetween a corporate bond with a 7% coupon and a muni bond with a 5% coupon, the ____________ bond is more attractive for an investor in a 20% tax bracket because the muni bond’s equivalent taxable yield is _________ . A. corporate; 7.14% B. corporate; 6.25% C. muni; 7.14% D. muni; 6.25%arrow_forwardA 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?arrow_forward
- Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning