HomeworkLib
Question

A bond investor is considering two 10 year maturity bonds both rated AA:   the municipal bond...

A bond investor is considering two 10 year maturity bonds both rated AA:  
the municipal bond is yielding 2.47% and the corporate bond is yielding 4.36%.  
At what marginal tax rate would the bond investor be indifferent between the two bonds?
business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Aftertax corporate bond yield=4.36*(1-tax rate)

Hence for investor to be indifferent:

4.36*(1-tax rate)=2.47%

1-tax rate=2.47/4.36

tax rate=1-(2.47/4.36)

which is equal to

=43.35%(Approx).

1 0
Add a comment
Know the answer?
Add Answer to:
A bond investor is considering two 10 year maturity bonds both rated AA:   the municipal bond...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • A bond investor is considering two 10 year maturity bonds both rated A: the municipal bond...

    A bond investor is considering two 10 year maturity bonds both rated A: the municipal bond is yielding 2.40% and the corporate bond is yielding 3.25%. At what marginal tax rate would the bond investor be indifferent between the two bonds? Enter your answer rounded off to two decimal points.

  • A bond investor is considering two 10 year maturity bonds both rated A: the municipal bond...

    A bond investor is considering two 10 year maturity bonds both rated A: the municipal bond is yielding 2.40% and the corporate bond is yielding 3.25%. At what marginal tax rate would the bond investor be indifferent between the two bonds? Enter your answer rounded off to two decimal points.

  • A municipal bond has yield to maturity of 5.08 percent. A comparable corporate bond has yield...

    A municipal bond has yield to maturity of 5.08 percent. A comparable corporate bond has yield to maturity of 7.24 percent. Which of these two bonds should an investor with a marginal tax rate of 28 percent buy? A. The corporate bond because it offers a higher after-tax yield to maturity. B. The corporate bond because its stated yield to maturity of 7.24 percent is higher than the municipal bond's stated yield to maturity of 5.08 percent. CC. The municipal...

  • 1)- A municipal bond selling at par currently yields 7.5%. A corporate bond selling at par...

    1)- A municipal bond selling at par currently yields 7.5%. A corporate bond selling at par currently yields 10%. At what marginal tax rate would an investor be indifferent between this two bonds? 2)- A corporate bond selling at par currently yields 7.5%. Amy's marginal tax rate is 20%. How much should a municipal bond selling at par yields so that Amy is indifferent between this two bonds? 3)- A municipal bond selling at par currently yields 6.5%. Bob's marginal...

  • Municipal bonds are tax-exempt from the Federal income tax. Assume a new 10-year municipal bond has...

    Municipal bonds are tax-exempt from the Federal income tax. Assume a new 10-year municipal bond has a 3%/year coupon rate. What would be the required coupon rate on a taxable bond for an investor to be indifferent in holding a taxable bond compared to the 3% tax-free bond? Assume the investor is in a 40% marginal income tax bracket. Both bonds have the same credit quality. 5.0% 1.8% 1.2% 7.5% 3.0%

  • Calculate the after-tax return of a 8.15 percent, 20-year, A-rated corporate bond for an investor in...

    Calculate the after-tax return of a 8.15 percent, 20-year, A-rated corporate bond for an investor in the 10 percent marginal tax bracket. Compare this yield to a 7.16 percent, 20-year, A-rated, tax-exempt municipal bond and explain which alternative is better. Repeat the calculations and comparison for an investor in the 33 percent marginal tax bracket. The after-tax return of a 8.15 percent, 20-year, A-rated corporate bond for an investor in the 10 percent marginal tax bracket is 7.34 %. (Round...

  • the bonds issued by Jones Corporation are rated AA by Standard & Poor's and have 10...

    the bonds issued by Jones Corporation are rated AA by Standard & Poor's and have 10 years to maturity and a YTM of 6%. The binds of Smith copeation are rated B by standard & Poor's and also have 10 years to maturity and a YTM of 6%. as a bind investor, which bond is the better buy? A Grace Corporation bonds B Jesse Corporation bonds C the investor should be indifferent between the two bonds sincs they both have...

  • A tax-exempt municipal bond has a yield to maturity of 4.99%. An investor, who has a...

    A tax-exempt municipal bond has a yield to maturity of 4.99%. An investor, who has a marginal tax rate of 30.00%, would prefer and an otherwise identical taxable corporate bond if it had a yield to maturity of more than ____%.

  • Calculate the​ after-tax return of a 6.35 ​percent, 20-year,​ A-rated corporate bond for an investor in...

    Calculate the​ after-tax return of a 6.35 ​percent, 20-year,​ A-rated corporate bond for an investor in the 10 percent marginal tax bracket. Compare this yield to a 4.85 ​percent, 20-year,​ A-rated, tax-exempt municipal bond and explain which alternative is better. Repeat the calculations and comparison for an investor in the 35 percent marginal tax bracket.

  • Suppose that five-year AAA-rated municipal bonds were yielding 2.88% whereas five-year AAA-rated corporate bonds were yielding...

    Suppose that five-year AAA-rated municipal bonds were yielding 2.88% whereas five-year AAA-rated corporate bonds were yielding 4.23%. Municipal bonds are typically tax-exempt at the federal level, whereas corporate bonds are fully taxable. The lower pre-tax return on municipal bonds is called: A. An explicit tax B. An implicit tax C. An outrageous tax D. An egregious tax E. An estate tax

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT