Forever Savings Bank regularly purchases municipal bonds issued by small rural school districts in its region of the state. At the moment, the bank is considering purchasing an $8 million general obligation issue from the York school district, the only bond issue that the district plans this year. The bonds, which mature in 15 years, carry a nominal annual rate of return of 6.75 percent. Forever Savings, which is in the top corporate tax bracket of 35 percent, must pay an average interest rate of 4.25 percent to borrow the funds needed to purchase the municipals. Would you recommend purchasing these bonds? Calculate the net after-tax return on this bank-qualified municipal security? What is the tax advantage for being a qualified bond?
Forever Savings Bank regularly purchases municipal bonds issued by small rural school districts in its region of the state. At the moment, the bank is considering purchasing an $8 million general obligation issue from the York school district, the only bond issue that the district plans this year. The bonds, which mature in 15 years, carry a nominal annual rate of return of 6.75 percent. Forever Savings, which is in the top corporate tax bracket of 35 percent, must pay an average interest rate of 4.25 percent to borrow the funds needed to purchase the municipals. Would you recommend purchasing these bonds? Calculate the net after-tax return on this bank-qualified municipal security? What is the tax advantage for being a qualified bond?
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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- Forever Savings Bank regularly purchases municipal bonds issued by small rural school districts in its region of the state. At the moment, the bank is considering purchasing an $8 million general obligation issue from the York school district, the only bond issue that the district plans this year. The bonds, which mature in 15 years, carry a nominal annual
rate of return of 6.75 percent. Forever Savings, which is in the top corporate tax bracket of 35 percent, must pay an average interest rate of 4.25 percent to borrow the funds needed to purchase the municipals. Would you recommend purchasing these bonds?
Calculate the net after-tax return on this bank-qualified municipal security? What is the tax advantage for being a qualified bond?
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