Sally Is Choosing Between Two Bonds Both of Which Mature

question 20

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 5.75 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 28 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 will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B.
• C) Sally should select Bond A because its TEY is greater than the yield of Bond B.
• D) Sally should select Bond B because the TEY of Bond A is less than the yield of Bond B.

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Definitions:

Vice President

An official or executive ranking below the president of a country or organization, often tasked with specific duties or acting in the president's absence.

Hans Selye

A scientist known for his research on the effects of stress on the human body and for formulating the General Adaptation Syndrome model.

Alarm Phase

The initial stage of the body's response to stress, activating the fight or flight response and preparing the body to face or flee the threat.

Chronic Stress Phase

A prolonged period of stress without adequate relief or relaxation, leading to various health issues such as anxiety, depression, and cardiovascular diseases.