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.

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Definitions:

Reversing Entry

An accounting entry that is made at the beginning of an accounting period to reverse or cancel out adjusting entries made at the end of the previous period.

Reversing Entries

Journal entries made at the beginning of an accounting period to reverse or cancel out adjusting entries made at the end of the previous period.

Adjusting Entries

Bookkeeping adjustments made before the preparation of financial statements to account for accruals and deferrals not recorded through daily transactions.

Optional

Optional refers to a choice or item that is not mandatory and can be selected based on preference or requirement.