Question
Kelly is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal
Kelly is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 6.25 percent. Bond B is a corporate bond that yields 7.75 percent. If Kelly is in the 25 percent tax bracket, which bond should she select and why?
a) Kelly should select the municipal bond because its interest income is not taxable
b) Kelly should select the corporate bond because it has lower risk
c) Kelly should select the municipal bond because its taxable equivalent yield is greater than the yield of the corporate bond
d) Kelly should select the corporate bond because the taxable equivalent yield of the municipal bond is less than the yield of the corporate bond
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