Question

1. Karen Black is in the 30% personal tax bracket. She is considering investing in AXZ (taxable) bonds that carry a 10% interest rate.
   1. What is her after-tax yield (interest rate) on the bonds?
   2. Suppose Newport Hospital has issued tax-exempt bonds that have an interest rate of 7.5%. With all else the same, should Ms. Black buy the AXZ or Newport Hospital bonds?
   3. With all else the same, what interest rate on the tax-exempt Newport Hospital bonds would make these bonds and the AXZ bonds equally advantageous?

Answer 1

a

After tax rate = YTM * (1-Tax rate)

After tax rate = 10 * (1-0.3)

After tax rate = 7

b

Newport Hospital bonds

c

7%