a. A taxpayer is considering buying a fully taxable corporate bond. The bond has a remaining maturity of 5 years, promises to pay 6% interest annually (assume the coupon interest is payable annually), and has a face value of $1,000. the taxpayer faces a 31% tax rate on the interest income and requires a pretax rate of return of 6% to invest. What price is the taxpayer willing to pay for this bond?

b. The same taxpayer is also considering buying a tax-exempt municipal bond. The municipal bond has a remaining maturity of 5 years, also promises to pay 6% intererst annually (again the coupon interest is payable annually), and has a face value of $1,000. Assume the corporate and municipal bonds are equally risky. At what price is the taxpayer indifferent between the corporate and municipla bond? (Alternately stated, what price is the taxpayer willing to pay for the municipal bond assuming he requires a pretax rate of return of 6% and faces a marignal tax rate of 31%?)