Sally Is Choosing Between Two Bonds Both of Which Mature

question 128

Multiple Choice

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.25 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 30 percent tax bracket, which bond should she select and why?

• A) Sally should select Bond A because its interest income is not taxable.
• B) Sally should select Bond B because it has lower risk.
• C) Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B.
• D) Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B.

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Definitions:

Extraction

The process of separating a particular substance from a mixture or compound.

Databases

Organized collections of data that are stored and accessed electronically from a computer system, designed for easy retrieval, management, and updating of data.

Interval Scale

A scale of measurement where the intervals between numbers on the scale are all equal in size.

Measurement

The process or the result of quantifying the characteristics of an object or event, which can be expressed numerically.