Suppose the state of Indiana issued a tax-exempt bond to pay for student fees in its universities. The bond currently has a yield of 0.8 percent. 2. Suppose Mike is paying a marginal tax rate of 20% and Peter is paying a marginal tax rate of 30%. Calculate the equivalent taxable yields of this bond to both Mike and Peter. Mike: 0.8/(1-.2)=1 Peter: 0.8/(1-.3)= 2.67 3. Suppose that the yield on a Baa-rated corporate bond, a bond with the same credit rating as the state of Indiana, is 1.4 percent. Calculate the yield ratio between the tax-exempt bond vs the taxable bond, and briefly interpret what the yield ratio implies.
Suppose the state of Indiana issued a tax-exempt bond to pay for student fees in its universities. The bond currently has a yield of 0.8 percent. 2. Suppose Mike is paying a marginal tax rate of 20% and Peter is paying a marginal tax rate of 30%. Calculate the equivalent taxable yields of this bond to both Mike and Peter. Mike: 0.8/(1-.2)=1 Peter: 0.8/(1-.3)= 2.67 3. Suppose that the yield on a Baa-rated corporate bond, a bond with the same credit rating as the state of Indiana, is 1.4 percent. Calculate the yield ratio between the tax-exempt bond vs the taxable bond, and briefly interpret what the yield ratio implies.
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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1. Suppose the state of Indiana issued a tax-exempt bond to pay for student fees in its universities. The bond currently has a yield of 0.8 percent.
2. Suppose Mike is paying a marginal tax rate of 20% and Peter is paying a marginal tax rate of 30%. Calculate the equivalent taxable yields of this bond to both Mike and Peter.
Mike: 0.8/(1-.2)=1
Peter: 0.8/(1-.3)= 2.67
3. Suppose that the yield on a Baa-rated corporate bond, a bond with the same credit rating as the state of Indiana, is 1.4 percent. Calculate the yield ratio between the tax-exempt bond vs the taxable bond, and briefly interpret what the yield ratio implies.
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