EBK INVESTMENTS
11th Edition
ISBN: 9781259357480
Author: Bodie
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 2, Problem 5CP
Summary Introduction
To calculate: The tax bracket or the Marginal tax rate at which the investor will be indifferent between the taxable bond and tax-exempt bonds.
Introduction:
Marginal tax rate: Income of individual is taxable if it crosses the limit imposed by the Government. So, Government decides some tax brackets which consist of tax percentages which will be imposed on tax payers if they qualify the income range. This tax percentage are called Marginal tax rate.
Tax-exempt bond: An investor is given certain bonds stating the rate of interest payable to him for a fixed tenure. When a tax is not charged on the income of bond then it is called tax-exempt bond.
Taxable bond: When an investors receives some bonds which as taxable under the Income tax laws approved by the Government, then these are called taxable bonds.
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Chapter 2 Solutions
EBK INVESTMENTS
Ch. 2 - Prob. 1PSCh. 2 - Prob. 2PSCh. 2 - Prob. 3PSCh. 2 - Prob. 4PSCh. 2 - Prob. 5PSCh. 2 - Prob. 6PSCh. 2 - Prob. 7PSCh. 2 - Prob. 8PSCh. 2 - Prob. 9PSCh. 2 - Prob. 10PS
Ch. 2 - Prob. 11PSCh. 2 - Prob. 12PSCh. 2 - Prob. 13PSCh. 2 - Prob. 14PSCh. 2 - Prob. 15PSCh. 2 - Prob. 16PSCh. 2 - Prob. 17PSCh. 2 - Prob. 18PSCh. 2 - Prob. 19PSCh. 2 - Prob. 20PSCh. 2 - Prob. 21PSCh. 2 - Prob. 22PSCh. 2 - Prob. 1CPCh. 2 - Prob. 2CPCh. 2 - Prob. 3CPCh. 2 - Prob. 4CPCh. 2 - Prob. 5CP
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- b) You can invest in taxable bonds that are paying a yield of 9.50% or a municipal bond paying a yield of 7.75%. If your marginal tax rate is 21%, which security bond should you buy? Answer:arrow_forwardCompare the coupon rate and the interest rate regarding bonds. What is a par value? Describe the impact of a tax shield on fixed income yields.arrow_forwardYou 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 %arrow_forward
- Zero 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_forwardSuppose 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)arrow_forwardSuppose you invest in a municipal bond that pays a yield of 9%. If your marginal tax is 29%, what is the equivalent yield on the taxable bond? (write your answer in percentage and round it to 2 decimal places)arrow_forward
- Suppose you invest in a municipal bond that pays a yield of 4. If your marginal tax is 17%, what is the equvalent yield on the taxable bond? (write your answer in percentage and round it to 2 decimal places)arrow_forwardMunicipal 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?arrow_forwardFor tax purposes, the implicit annual interest for any one year on a zero coupon bond is equal to Multiple Choice zero. the current yield. the face value minus the current market value. the face value multiplied by the current market rate of interest. the annual change in the bond's value as determined by amortizing the loan.arrow_forward
- Suppose 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_forward3. The after tax yield on a bond is (1- tax rate) x yield. Suppose that someone has a tax rate of 25%, that the interest rate on a bond with taxable interest is 5%, and the the interest rate on a bond whose interest is not taxable is 4%. Show that other things the same that this person gets a higher after tax yield by holing the second bond.arrow_forwardC) 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?arrow_forward
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