Consider a coupon bond with 15 years to maturity. The coupon rate is 8%, and the

principal is 100. The marginal tax rate on interest income is 40%.

1. (a) If yield to maturity is 2%, with simple compounding, what is the bond price?

2. (b) At the 40% tax rate, would be the yield to maturity of an equivalent municipal bond?

3. (c) Which security under (a) and (b) above would be picked by a foreign investor who does not pay income tax in the United States?