Assume That Jose Is Indifferent Between Investing in a Corporate

question 5

Multiple Choice

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield. Assume that the tax rate on dividends is 15%. What is Jose's marginal tax rate?

• A) 37%.
• B) 15%.
• C) 32%.
• D) 47%.
• E) None of the choices are correct.

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Definitions:

Coupon Rate

The annual interest rate paid by a bond expressed as a percentage of the bond's face value.

YTM

Yield to Maturity, the total return anticipated on a bond if held until it matures.

Premium Bonds

Bonds sold for more than their face value due to offering interest rates higher than the current market average.

Discount Bonds

Bonds that are sold for less than their face value, typically reflecting that the market interest rates are higher than the bond's coupon rate.