A 70 Percent Coupon Bond Issued by the State of Tennessee

question 21

Multiple Choice

A 7.0 percent coupon bond issued by the State of Tennessee sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after-tax return to the investor as the municipal bond if the investor is in the 29 percent marginal tax bracket?

• A) 7.59 percent
• B) 12.25 percent
• C) 9.86 percent
• D) 14.63 percent
• E) 30.71 percent

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Definitions:

Wage Bracket

A range or category of income levels used to calculate tax withholdings or determine pay scales based on earnings.

Withholding Table

A chart or table used by employers to determine the amount of tax to withhold from an employee's paycheck based on earnings and tax status.

Interest-Bearing Note

A debt instrument that pays interest to the holder at a fixed or variable rate over a specified period.

Interest Expense

The cost incurred by an entity for borrowed funds, considered a non-operating expense on the income statement.