Question

Suppose IBM bonds have a pretax yield of 9%, Treasury bonds have a pretax yield of 7.75%, and Ilinois GO bonds have a pretax yield of 5.50%. Based solely on tax considerations, which of these three bonds would the following investors prefer? a. An investor in Michigan with marginal federal tax rate= 28% and state tax rate 9% b. An investor in New York with marginal federal tax rate 28% and state tax rate 15% c. An investor in Illinois with marginal federal tax rate = 35% and state tax rate 5% d. An investor in Illinois with marginal federal tax rate 15% and state tax rate 5% e. A qualified tax-exempt pension fund

Answer 1

Solution :  

Option b

Reason

Majority of bonds are issued under government authority and are been tax free at federal level as well as state level. Among all the five options, the maximum tax benefit which will be availed by the investor is under option b (i.e. 43%).Hence in my opinion based on solely tax considerations, the investor in option b will prefer in investing these bonds