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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