Cookeville City Council is trying to issue a municipal bond that is tax free. A current taxable bond that has similar risk characteristics is traded at $1012.34. The taxable bond has 10-year maturity with semi-annual coupon payment at 8% annual coupon rate. If the tax rate is 40%, what is the annual coupon rate that the Cookeville City Council should provide on its municipal bond to equate its price to that of the taxable bond? 5.114% 4.272% 3.889% 4.848% 4.717%

Cookeville City Council is trying to issue a municipal bond that is tax free. A current taxable bond that has similar risk characteristics is traded at $1012.34. The taxable bond has 10-year maturity with semi-annual coupon payment at 8% annual coupon rate. If the tax rate is 40%, what is the annual coupon rate that the Cookeville City Council should provide on its municipal bond to equate its price to that of the taxable bond? 5.114% 4.272% 3.889% 4.848% 4.717%

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A state issued muni bond offered at a coupon rate of 4% is preferred over a junk bond of 6% when a taxpayer's federal marginal tax bracket is 30% and their state is 5%. (The investor is a resident of the state the muni is issued in and is also exempt from state taxation.) True False
Indiana University is issuing a zero-coupon bond to fund the new Academic Health Sciences Building on campus. The bonds will have a maturity of 50 years and a par value of $1,000. The current yield on similar bonds is 11%. What is the expected price of this bond, using the semiannual convention?
Yosemite Corporation has an outstanding debt of $10.05 million on which it pays a 7 percent fixed interest rate annually. Yosemite just made its annual interest payment and has three years remaining until maturity. Yosemite believes that interest rates will fall over the next three years and that floating-rate debt will allow it to reduce its overall borrowing costs. A bank offers Yosemite a three-year interest rate swap with annual payments in which Yosemite will pay LIBOR, currently at 4.4 percent, and receive a 3.9 percent fixed rate on $10.05 million notional principal. Suppose that LIBOR turns out to be 3.8 percent in one year and 3.5 percent in two years. Including interest payments on Yosemite's outstanding debt and payments on the swap, what will be Yosemite's net interest payments for the next three years? Note: Negative values should be indicated by parentheses. Year 1 Net Interest Payments $(26,130,000 Year 2 $(30,150,000) Year 3 $(27,135,000)
Yosemite Corporation has an outstanding debt of $10.03 million on which it pays a 5 percent fixed interest rate annually. Yosemite just made its annual interest payment and has three years remaining until maturity. Yosemite believes that interest rates will fall over the next three years and that floating-rate debt will allow it to reduce its overall borrowing costs. A bank offers Yosemite a three-year interest rate swap with annual payments in which Yosemite will pay LIBOR, currently at 4.2 percent, and receive a 3.7 percent fixed rate on $10.03 million notional principal. Suppose that LIBOR turns out to be 3.6 percent in one year and 3.3 percent in two years. Including Interest payments on Yosemite's outstanding debt and payments on the swap, what will be Yosemite's net interest payments for the next three years? Note: Negative values should be indicated by parentheses. Answer is complete but not entirely correct. Net Interest Payments Year 11 $ (180,540) Year 21 $ (120,360) Year 3 $…
Five years ago, the State of Oklahoma issued $2,000,000 of 7% coupon, 20-year semiannual payment, tax-exempt bonds. The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so. The call premium would be 6% of the face amount. Today 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2%. What is the net present value of the refunding? Because these are tax-exempt bonds, taxes are not relevant. $278,606 $258,606 $238,606 $208,606 $198,606
Yosemite Corporation has an outstanding debt of $10.12 million on which it pays a 5 percent fixed interest rate annually. Yosemite Just made its annual interest payment and has three years remaining until maturity. Yosemite believes that interest rates will fall over the next three years and that floating-rate debt will allow it to reduce its overall borrowing costs. A bank offers Yosemite a three-year interest rate swap with annual payments in which Yosemite will pay LIBOR, currently at 5.1 percent, and receive a 4.6 percent fixed rate on $10.12 million notional principal. Suppose that LIBOR turns out to be 4.5 percent in one year and 4.2 percent in two years. Including interest payments on Yosemite's outstanding debt and payments on the swap, what will be Yosemite's net interest payments for the next three years? Note: Negative values should be indicated by parentheses. Year 11 Year 2 Year 3 Net Interest Payments 12
Sandhill has determined that it could issue $1050 face value bonds with an 8 percent coupon paid semiannually and a 5-year maturity at $954.05 per bond. If Sandhill's marginal tax rate is 36 percent, its after-tax cost of debt is closest to: 6.6 percent. 6.9 percent. 6.2 percent. 6.3 percent.
Prepare a schedule for the following bond, including calculations, yearly income, end-of-year accumulations, and net of tax: You purchase a one-year municipal bond for $150,000. Every year on December 30, the muni bond will mature and pay interest, and on that date, you will put the income, net of any taxes due, in a bank CD and utilize the principle to purchase another one-year muni-bond. The CD also has a maturity of one year, and you'll reinvest the principle and any CD income, net of any tax he owes, together with the muni revenue, in another CD, and so on. When the last muni and CD mature at the end of year three, you will keep the CD and muni amounts as of that time, net of any taxes due, to support your children's education. （you invest on Jan 1 on the first year, and cash out on December 31 on the last year). You are, and will stay, in the 40% ordinary income and 20% long-term capital gains tax rates. The muni-bond has a rate of return of 4%, whereas a CD has a rate of return…
The company has made an investment in government bonds. The bonds will generate an interest income of OMR 18707 each year for 6 years. The interest rate is 12% annually. Compute present value of the stream of interest income for 6 years. Select one: Oa. 95619.10 Ob. All the given choices in this question are not correct Oc 4550.02 Od. 58205.10 Oe. 76912.10
Exxo Mobile expects an EBIT of $20,000 every year in perpetuity. The firm currently has no debt, and its cost of equity is 15 percent. The tax rate is 30 percent. The firm plans to borrow money to repurchase its stock such that the debt-value ratio after the restructuring becomes 50 percent permanently. What is the firm value if the firm borrows at 8 percent? O $135,922.33 O $93,333.33 O $156,862.75 O $109,803.92
2) Consider the decision to purchase either a 7-year corporate bond or a 7-year municipal bond. The corporate bond is a 14% annual coupon bond with a par value of $1,000. It is currently yielding 12%, The municipal bond has an 9% annual coupon and a par value of $1,000. It is currently yielding 8%. Which of the two bonds would be more beneficial to you? Assume that your marginal tax rate is 30%.
Suppose that short-term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Required: Which gives you the higher after-tax yield if your combined tax bracket is: Higher After-Tax Yield a. Zero Municipal bond b. 10% Taxable bond c. 20% Municipal bond d. 30% Neither

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