Morris Is Considering Investing in Some Bonds

question 65

Multiple Choice

Morris is considering investing in some bonds.Morris is in the 33% tax bracket.His broker tells him about City of Fargo,North Dakota,bonds with a yield of 6%.

• A)A U.S. Treasury bond paying 6% interest will have a greater after-tax yield than the City of Fargo bonds.
• B)A U.S. Treasury bond paying 6% interest will have the same after-tax yield as the City of Fargo bonds.
• C)The after-tax yield on City of Fargo bonds is 4% [(1.0 - .33) * 6%].
• D)A taxable bond will have to pay 9% (6% ÷ .67) interest to provide an after-tax yield equal to the yield on the City of Fargo bonds.