You Are Trying to Decide Between a Par Value Corporate

question 33

Multiple Choice

You are trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%.Assuming all other factors are the same and you are in the 28% tax bracket,which bond should you choose and why?

• A) Corporate bond because the after tax yield is 6.25%.
• B) Corporate bond because the after tax yield is 4.5%.
• C) Municipal bond because the equivalent taxable yield is 6.3%.
• D) Municipal bond because the equivalent taxable yield is 6.6%.
• E) You will be indifferent between the two because the after tax yields are the same.

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Definitions:

Long-Run Average Cost Curve

A curve showing the lowest possible cost at which a firm can produce any given level of output in the long run when all inputs are variable.

Downward Sloping

Describes a line or curve on a graph that shows a decrease in value as it moves from left to right, often used in economics to describe how changes in price affect demand.

Economies of Scale

The cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output decreasing with increasing scale.

Health Insurance Costs

The expenses associated with medical policies that cover the cost of medical services for the insured.