Sally Is Choosing Between Two Bonds Both of Which Mature

question 17

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 7.20 percent. Bond B is a corporate bond that yields 10.00 percent. If Sally is in the 28 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 will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B.
• 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:

Low Rank Positions

Job titles or roles within an organization that are lower in hierarchy, often associated with fewer responsibilities and lower pay.

Kingsley Davis

A prominent American sociologist and demographer known for his work on human populations, family structure, and urbanization.

More Pleasant

Referring to something that is nicer, more enjoyable, or more agreeable in comparison to something else.

Talcott Parsons

An American sociologist known for his contributions to social action theory and for developing the framework of structural functionalism.