Question
1: Mark is an investor with a 30 percent marginal tax rate and is aware of a municipal bond that has a 7.00 percent yield.
1: Mark is an investor with a 30 percent marginal tax rate and is aware of a municipal bond that has a 7.00 percent yield. What yield must corporate bonds offer to match the muni bond yield of 7.00 percent? Explain your answer.
2: Daryl is an investor who buys a high-yield corporate bond. He earns a before-tax yield of 11.00 percent and an after-tax yield of 9.50 percent. What is Daryls marginal tax rate? Explain your answer.
3: There is a sudden shock to the economy and as a result, the 1-year interest rate (short-term rate) decreases from 2.10 percent to 1.40 percent and the 10-year interest rate (long-term rate) decreases from 4.00 percent to 3.00 percent. Your supervisor has not seen the rate changes and will be meeting with a client later today. Your supervisor asks you for an explanation on which interest rate decreased more, the 1-year interest rate or the 10-year interest rate. What would you tell him? Explain your answer.
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