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Question 2-15I

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Essentials Of Investments
Found in: Page 50
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 9% yields, what must municipals offer for the investor to prefer them to corporate bonds?

The municipals must offer at least 6.30% yields

See the step by step solution

Step by Step Solution

Definition

The municipal bonds are tax exempt bonds issued by state and local governments. . Corporate bonds are means through which companies raise funds from the public.

Solution

The after tax yield on the corporate bond is:

r(1-t) = rmuni

9%(1-30%) = rmuni

=6.3%

Therefore the municipals must offer at least 6.30% yields.

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