Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 6, Problem 2P
Corporate bonds issued by Johnson Corporation currently yield 8%. Municipal bonds of equal risk currently yield 6%. At what tax rate would an investor be indifferent between these two bonds?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
If the municipal bond rate is 6% and the corporate bond rate is 8%, what is the marginal tax rate, assuming investors are indifferent between the two bonds?
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?
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?
Chapter 6 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 6 - Prob. 2QCh. 6 - If a “typical” firm reports $20 million of...Ch. 6 - Prob. 4QCh. 6 - What is operating capital, and why is it...Ch. 6 - Explain the difference between NOPAT and net...Ch. 6 - Prob. 7QCh. 6 - Prob. 8QCh. 6 - Prob. 1PCh. 6 - Corporate bonds issued by Johnson Corporation...Ch. 6 - Prob. 3P
Ch. 6 - Talbot Enterprises recently reported an EBITDA of...Ch. 6 - Kendall Corners Inc. recently reported net income...Ch. 6 - In its most recent financial statements,...Ch. 6 - Prob. 7PCh. 6 - Prob. 8PCh. 6 - Prob. 9PCh. 6 - The Moore Corporation has operating income (EBIT)...Ch. 6 - The Berndt Corporation expects to have sales of 12...Ch. 6 - Prob. 12PCh. 6 - What effect did the expansion have on sales and...Ch. 6 - Prob. 2MCCh. 6 - Prob. 3MCCh. 6 - Prob. 4MCCh. 6 - What is Computron’s free cash flow (FCF)? What are...Ch. 6 - Calculate Computron’s return on invested capital...Ch. 6 - Cochran also has asked you to estimate Computrons...Ch. 6 - Prob. 8MCCh. 6 - Assume that a corporation has $100,000 of taxable...Ch. 6 - Prob. 10MC
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
- 7. Zero-coupon bonds are the best way for high-income taxpayers to extract maximum value from tax-exempt state and local government bonds because: a.Zero-coupon bonds are sold for nearly their full face value and provide most of their income in the form of interest. b.Zero-coupon bonds allow the investor to make additional tax-exempt investments. c.The interest earned on the accumulated principal and interest is not tax-exempt. d.The investments pay interest continually. e.Zero-coupon bonds include more transaction fees.arrow_forwardQuestion 1: Assume that Larry's marginal tax rate is 25%. If corporate bonds pay 7.4% interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds? Multiple Choice a) 25.00% b) 9.25% c) 7.40% d) 5.55% e) None of the choices are correct.arrow_forwardZero coupon bonds: O a. create annual taxable income to individual bondholders. O b. create a tax deduction for the issuer only at maturity. O care issued only by the U.S. Treasury. O d. are issued at a premium. O e. are valued using simple interest.arrow_forward
- 2. Which of the following is a reason why zero-coupon bonds are the best way for high-income taxpayers to extract maximum value from tax-exempt state and local government bonds? a.The investments pay interest continually. b.The interest earned on the accumulated principal and interest is not tax-exempt. c.Zero-coupon bonds are high-risk, high-reward bonds. d.Zero-coupon bonds include more transaction fees. e.Zero-coupon bonds allow the investor to make additional tax-exempt investments.arrow_forwardIf current Corporate Bond Rates are 4% and Municipal Bond Rates are 3%, at what marginal tax rate are you indifferent between the two bonds (meaning they have the same equivalent yield). (Round your answer to the nearest whole percent. No percent sign needed. i.e. 53)arrow_forwardSuppose a municipal bond offers a 4% rate of interest. A corporate bond comes with a 6% coupon but the interest payment is subject to taxes. What is rate of tax at which you will be indifferent between the twobonds?arrow_forward
- 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 Falsearrow_forwardFind the present value of interest tax shields generated by these three debt issues.Consider corporate taxes only. Assume the marginal corporate tax rate is 30%.a. A $1000, one-year loan at 8%.b. A $1000, five-year loan at 8%. Assume no principal is repaid until maturity.c. A $1000, perpetuity loan at 7%. Please explain step by step with proper formulasarrow_forwardyour professor has taught you that because municipal bonds (or any other tax-saving) bond would offer a tax saving on the interest income, the interest rate offered by such bonds may be even lower than the treasury bonds. while what your professor has told you is correct, imagine a situation where income tax rates are reduced. describe the effect of a reduction in income tax rates on the interest rates of municipal bonds? would interest rates on Treasury bonds be affected as well? how?arrow_forward
- Identify the following as either an advantage or a disadvantage of bond financing for a company. a. Bond interest payments reduce total taxes paid. b. Bonds do not affect owner control. c. A company earns a lower return with borrowed funds than it pays in interest. d. A company earns a higher return with borrowed funds than it pays in interest. e. Bonds require payment of periodic interest. f. Interest on bonds is tax deductible.arrow_forwardIdentify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. Interest on bonds is tax deductible.arrow_forwardAn investor in the 22 percent tax bracket is trying to decide which of two bonds to select: one is a 5.5 percent U.S. Treasury bond selling at par; the other is a municipal bond with a 4.25 percent coupon, which is also selling at par. Which of these two bonds should the investor select? Why?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning
Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Pfin (with Mindtap, 1 Term Printed Access Card) (...
Finance
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Cengage Learning
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
Journalizing Bonds Payable/Amortization of a Premium; Author: TLC Tutoring;https://www.youtube.com/watch?v=5gEpAFFnIE8;License: Standard YouTube License, CC-BY
Investing Basics: Bonds; Author: TD Ameritrade;https://www.youtube.com/watch?v=IuyejHOGCro;License: Standard YouTube License, CC-BY