Sally Is Choosing Between Two Bonds Both of Which Mature

question 4

Multiple Choice

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.25 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 30 percent tax bracket, which bond should she select and why?

• A) Sally should select Bond A because its interest income is not taxable.
• B) Sally should select Bond B is better because it has lower risk.
• C) Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B.
• D) Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B.

---

Definitions:

Random Assignment

A method used in experiments to ensure that every participant has an equal chance of being placed in any given group, eliminating biases.

Experimental Conditions

Specific arrangements or settings made to test hypotheses in a controlled manner during scientific experiments.

Equal Chance

The principle or condition of having the same opportunities or possibilities as others, without discrimination or bias.

Experimental Research

A research methodology that involves manipulating one or more variables to determine their effect on a certain outcome, allowing for cause-and-effect inferences.