Daniel Plans to Invest $20,000 in Either a Corporate Bond

question 98

Multiple Choice

Daniel plans to invest $20,000 in either a corporate bond paying 5% or a tax-exempt bond with a 4% interest rate.The bonds have an equivalent level of risk.Daniel has a 35% marginal tax rate and wants to maximize his after-tax earnings.Daniel should

• A)invest in the corporate bond due to its higher stated interest rate.
• B)invest in the tax-exempt bond since its yield is more than the after-tax return on the corporate bond.
• C)invest in the corporate bond because its after-tax earnings are more than the return on the tax-exempt bond.
• D)allocate his money equally between the two investments.

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Definitions:

Liability

Any type of financial debt or obligation that a company or individual owes, which must be settled in the future through the transfer of assets, provision of services, or other forms of payment.

Asset

Resources owned by a business or individual that have economic value and can be used to meet debts, commitments, or legacies.

Stockholders' Equity

The residual interest in the assets of a corporation after deducting liabilities, representing ownership interest in the company.

Dividends

Dividends are a portion of a company's earnings distributed to its shareholders as a reward for their investment in the company.