Holding Liquidity and Default Risk Constant, an Investor Earning 6

question 46

Multiple Choice

Holding liquidity and default risk constant, an investor earning 6% from a tax-exempt bond who is in a 25% tax bracket would be indifferent between that bond and a taxable bond with a(n) :

• A) 8% yield.
• B) 4.5% yield.
• C) 6.25% yield.
• D) 7.5% yield.

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Definitions:

Company's Own Stock

Shares of its own stock that a company has bought back from shareholders and holds in its treasury.

Financing Activities

Transactions and events where cash is raised or repaid to investors and creditors, part of a company’s cash flow statement.

Cash Inflow

Money entering a business from various sources, including sales, investments, financing activities, and more.

Issuing Bonds

The process of offering bonds to investors as a form of debt security, raising capital for the issuer.