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:

A-not-B Effect

A cognitive error observed in infants, where they will repeatedly reach for an object at a location (A) where it was previously found, despite seeing it moved to a new location (B).

Demonstrate

To show or prove something clearly through evidence or arguments.

Mature Concept

A fully developed and comprehensive understanding or idea that has been refined and thoughtfully considered over time.

Physically Impossible

An action, event, or process that cannot occur or be achieved within the realms of natural laws and physical constraints.