Question
An investor is comparing the following two bonds: a bond from ABC Corp which pays an interest rate of 9 percent per year and a
An 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 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.
b. The ABC bond because it pays an equivalent after-tax rate of 10.6 percent, while the municipal bond pays out an equivalent after-tax rate of 9.3 percent.
c. The ABC bond because it pays a 9 percent interest rate, while the municipal bond only pays 7.9 percent.
d. 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 10.6 percent.
e. None of these choices are correct.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started