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

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

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter2: Financial Statements, Cash Flow,and Taxes

Section: Chapter Questions

Problem 12MC

See similar textbooks

Related questions

Q: None

Q: Zero-coupon bonds are the best way for high-income taxpayers to extract maximum value from…

A: A zero coupon bond is defined as the instrument used by a company to raise additional capital from…

Q: You have just purchased a municipal bond with a $10,000 par value for $9,500. You purchased it…

A: Bonds refer to instruments that companies issue to raise debt capital from non-traditional sources…

Q: If the price of this bond decreases by $250 to $750, what will its effective interest rate be for…

A: Effective Interest rate of a bond is the yield on the bond. It is rate that defines the rate of…

Q: Before-tax cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment…

A: The Cost of Debt is the effective rate that a company pays on the debt it owes. In this case, we are…

Q: A corporate bond pays 9.75% interest. You are in the 29 percent tax bracket. What is your after-tax…

A: In this question we need to compute the after tax yield on the bond. Yield on bond = 9.75% Tax rate…

Q: Suppose the government decides to issue a new savings bond that is guaranteed to double in value if…

A: Present value of Annuity The future cash flow is discounted to determine the present value of an…

Q: A man bought a 5% tax-free municipal bond. It cost $1000 and will pay $50 interest each year for 20…

A: The real rate is the interest rate which removes the effect of inflation to compute the real cost of…

Q: the 32% marginal tax bracket, this bond would offer an equivalent taxable yield of O 1) 8.25%. 2)…

A: Municipal yield = 8.75%Tax rate = 32%

Q: As an alternative, you are contemplating to incorporate and issue a bond to raise the capital…

A: A bond is a fixed pay instrument issued to represents to an advance made by a financial specialist…

Q: bond

A: 1) To calculate which bond is more beneficial we have to calculate the YTM. Formula for YTM is: YTM…

Q: K Before-tax cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment…

A: To accurately determine the before-tax cost of debt, we need to solve for the yield to maturity…

Q: Question 15 A corporate bond pays 8.7 percent interest. You are in the 30 percent tax bracket. What…

A: According to bartleby guidelines , if multiple questions are asked , then 1st question needs to be…

Q: Suppose the government decides to issue a new savings bond that is guaranteed t double in value if…

A: The rate of return refers to the minimum return that is being earned by the investors on the…

Q: What are some advantages and disadvantages of a typical AAA-rated municipal bond yielding 6%…

A: Municipal Bonds are issued by the state government. They may be treated as risk-free investment…

Q: Kelly Phillips, an investor who resides in Livingston NJ, has a marginal tax rate of 28%. If a NJ…

A: Yield to maturity = 5.53% Marginal Tax = 28%

Q: The stated rate is 5%; the market rate is 4%. The future value of Bonds payable is $1,000. When…

A: Future value of bonds payable = $1000Stated rate = 5%Market rate = 4%

Q: Suppose the government decides to issue a new savings bond that is guaranteed to double in value if…

A: Present value of annuity is the current value of the future payments that are calculated using the…

Q: None

A: To find the tax-equivalent yield for the municipal bond, follow these steps:Calculate the Bond's…

Q: The coupon rate on a tax-exempt bond is 5.6%, and the rate on a taxable bond is 8%. Both bonds sell…

A: Tax-exempt bond is 5.6%. By using the formula of Equivalent taxable yield, The formula of…

Q: What is the tex-equivalent interest rate needed if you purchase a municipal bond wiht a face value…

A: Municipal bonds are bonds issued by state or local governments. They are generally tax exempt.

Q: A 5-year corporate bond yields 10.70%. A 5-year municipal bond of equal risk yields 6.50%. Assume…

A: To determine the federal tax rate at which you would be indifferent between two bonds, you need to…

Q: .A government bond will pay $1,000 three years from now. If the interest rate on 3-year government…

A: Please refer to the image below.

Q: You are given the following details of three default free government bonds. Assume that one can take…

A: The problem case focuses on calculating the current price of bond C under the no-arbitrage…

Q: Calculate the cost of capital of a bond selling to yeild 13% for the purchaser of the bond. The…

A: Yield to purchaser = r = 13% Tax rate = t = 34%

Q: D) Suppose you can invest in a money market security that matures in 75 days and offers a 3% nominal…

A: Annual effective interest rate is interest rate considering after the effect of compounding.

Q: Suppose an investor is considering a corporate bond with a 6% before-tax yield and a tax-free…

A: Before tax rate = 6% To determine the marginal tax rate at which an investor would prefer the…

Q: Before-tax cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment…

A: Before tax cost of debt is the yield to maturity on the bond. It is the rate expected if the bond id…

Q: A municipal bond has a YTM of 5.19 percent while the YTM of a comparable taxable bond is 7.78…

A: Municipal bond yield (MY) = 0.0519Corporate bond yield (CY) = 0.0778Tax rate = ?Municipal bonds are…

Question

100%

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Understanding After-Tax Yields in Municipal and Taxable Bonds

VIEW

Step 2: Choose the Correct Answer

VIEW

Step 3: Explanation of Incorrect Option

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 4 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

What is the solution? See the attached.
Required: Find the equivalent taxable yield of the municipal bond for tax brackets of zero, 10%, 20%, and 30%, if it offers a yield of 4.60%. (Round your answers to 2 decimal places.) Equivalent Taxable Yield a. Zero % b. 10% % c. 20% % d. 30% % +
You can invest in taxable bonds that are paying a yield of 9.4 percent or a municipal bond paying a yield of 7.65 percent. Assume your marginal tax rate is 21 percent. a. Calculate the after-tax rate of return on the taxable bond? (Round your answer to 2 decimal places. (e.g., 32.16)) b. Which security bond should you buy? a b. Rate of return The security bond one should buy is %
You can invest in taxable bonds that are paying a yield of 9.7 percent or a municipal bond paying a yield of 7.95 percent. Assume your marginal tax rate is 21 percent. a. Calculate the after-tax rate of return on the taxable bond? (Round your answer to 2 decimal places. (e.g., 32.16))b. Which security bond should you buy?
Find the equivalent taxable yield of a short-term municipal bond currently offering yields of 4% for tax brackets of (a) zero, (b) 10%, (c) 20%, and (d) 30%.
C) Suppose that the interest rate on a taxable corporate bond is 9% and that the marginal tax is 28%. Suppose a tax-free municipal bond with a rate of 6.75% was available. Which security would you choose?
Suppose your marginal federal income tax rate is 25 percent. 1. What is your after-tax return from holding a one-year corporate bond with a yield of 5.25 percent? (1 pt) 2. What is your after-tax return from a holding a one-year municipal bond with a yield of 4 percent? (1 pt) 3. How would you decide which bond to hold? (Assume that Both bonds carry the same risk.) (1 pt)
Municipal bonds are yielding 4.4 percent if they are insured and 4.7 percent if they are uninsured. Your marginal tax rate is 28 percent and the inflation rate is 1.645%. Your equivalent taxable yield on the insured bonds is _____ percent and on the uninsured bonds is _____ percent. How would your answers change if your marginal tax rate falls to 13.5% and the inflation rate increases to 2.0639%? What would happen to the YTM of the uninsured bond if negative news was announced resulting in a decline in its credit rating? What would happen to the YTM of the insured bond if it suddenly lost its insurance?
A municipal bond you are considering as an investment currently pays a yield of 6.76 percent. a. Calculate the tax equivalent yield if your marginal tax rate is 28 percent.b. Calculate the tax equivalent yield if your marginal tax rate is 21 percent.
Assume you are in the 32 percent tax bracket and purchase a 3.26 percent, tax-exempt municipal bond. Calculate the taxable equivalent yield for this investment using the formula: Taxable equivalent yield = Tax-exempt return + (1 - Your tax rate) ÷ Note: Enter your answer as a percent rounded to 2 decimal places. Taxable equivalent yield %
Calculate the after-tax return of a(n) 5.625.62 percent, 20-year, A-rated corporate bond for an investor in the 1515 percent marginal tax bracket. Compare this yield to a(n) 3.683.68 percent, 20-year, A-rated, tax-exempt municipal bond, and explain which alternative is better. Repeat the calculations and comparison for an investor in the 3535 percent marginal tax bracket. Question content area bottom Part 1 The after-tax return of the 5.625.62%, 20-year, A-rated corporate bond for an investor in the 1515% marginal tax bracket is enter your response here%. (Round to two decimal places.) Part 2 Compare this yield to the 3.683.68%, 20-year, A-rated, tax-exempt municipal bond and explain which alternative is better. (Select the best answer below.) A. The after dash tax yield of 4.78 % for the corporate bond is a better alternative than the 3.68 % tax dash free municipal bondThe after-tax yield of 4.78% for the corporate bond is a better…
Assume your in the 28% tax bracket and purchase a municipal bond with yield of 3.10%. What is the taxable equivalent yield for this investment?