An Investor Is Comparing the Following Two Bonds: a Bond

question 131

Multiple Choice

An investor is comparing the following two bonds: a bond from ABC Corp which pays an interest rate of 9 percent per year and a municipal bond which pays an interest rate of 7.9 percent per year.The investor is in the 22 percent tax bracket.Which bond will give the investor a higher after-tax interest rate and for which reason?

• A)The ABC bond because it pays a 9 percent interest rate, while the municipal bond only pays 7.9 percent.
• B)The ABC bond because it pays an equivalent after-tax rate of 10.6 percent, while the municipal bond pays out an equivalent after-tax rate of 9.3 percent.
• C)The municipal bond because it pays an equivalent after-tax rate of 7.9 percent, while the ABC bond pays out an after-tax 7.02 percent interest rate.
• D)The municipal bond because it pays an equivalent after-tax rate of 7.9 percent, while the ABC bond pays out an equivalent after-tax rate of 10.6 percent.
• E)None of the above is correct.

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