You Are Trying to Decide Between a Par Value Corporate

question 33

Multiple Choice

You are trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%.Assuming all other factors are the same and you are in the 28% tax bracket,which bond should you choose and why?

• A) Corporate bond because the after tax yield is 6.25%.
• B) Corporate bond because the after tax yield is 4.5%.
• C) Municipal bond because the equivalent taxable yield is 6.3%.
• D) Municipal bond because the equivalent taxable yield is 6.6%.
• E) You will be indifferent between the two because the after tax yields are the same.

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Definitions:

Regression Analysis

A technique for determining the relationship intensity between variables, primarily used to predict values of a dependent variable based on values of independent variables.

Coefficient

A numeral or fixed quantity that comes before a variable in an algebraic formula, acting as its multiplier.

Predict

To make an educated guess about the future based on data, trends, or patterns.

Female Life Expectancy

The average number of years a female is expected to live based on statistical averages.