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.

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Definitions:

Social Dominance Orientation

A personality trait that predisposes individuals to prefer and support social hierarchy and dominance of their in-group over out-groups.

Social Comparison

The process of evaluating oneself in relation to others, often in terms of abilities, achievements, and status.

Social Order

A societal concept that implies a set of linked social structures, practices, and institutions which collectively ensure and maintain stability and predictability.

Identity Fusion

A profound feeling of oneness with a group and a perception that one’s personal identity and group identity are essentially the same. It is a strong motivator of collective action.