Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal government or bonds issued by state and local govemments (that is, they consider the bonds the same with respect to default risk, information costs, and liquidity). Suppose that state governments have issued perpetuities (or consoles) with $77 coupons and that the federal government has also issued perpetulties with $77 coupons. If the state and federal perpetuities both have after-tax yields of 5%, what are their pre-tax yields? (Assume that the relevant federal income tax rate is 38.09%) The pre-tax yield on the state perpetuity will be %. (Round your response to two decimal places)
Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal government or bonds issued by state and local govemments (that is, they consider the bonds the same with respect to default risk, information costs, and liquidity). Suppose that state governments have issued perpetuities (or consoles) with $77 coupons and that the federal government has also issued perpetulties with $77 coupons. If the state and federal perpetuities both have after-tax yields of 5%, what are their pre-tax yields? (Assume that the relevant federal income tax rate is 38.09%) The pre-tax yield on the state perpetuity will be %. (Round your response to two decimal places)
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 151.
Transcribed Image Text:Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal government or bonds issued by state and local governments (that is, they consider
the bonds the same with respect to default risk, information costs, and liquidity). Suppose that state governments have issued perpetuities (or consoles) with $77 coupons and that the federal
government has also issued perpetuities with $77 coupons. If the state and federal perpetuities both have after-tax yields of 5%, what are their pre-tax yields? (Assume that the relevant federal
income tax rate is 38.09%)
The pre-tax yield on the state perpetuity will be. (Round your response to two decimal places)
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