An investor is comparing the following two bonds: a bond from ABC Corp which pay

Question

An investor is comparing the following two bonds: a bond from ABC Corp which pays an interest rate of 9 percent per year and a municipal bond which pays an interest rate of 7.9 percent per year.  The investor is in the 15 percent tax bracket.  Which bond will give the investor a higher after tax interest rate and for which reason?

a) the ABC bond because it pays a 9 % interest rate, while the municipal pays 7.9%.

b)the ABC bond because it pays an equivalelnt after tax rate of 10.6%, while the municipal bond pays out an equivalent after tax rate of 9.3%.

c)the municipal bond because it pays an equivalent after tax rate of 9.3 percent, while the ABC bond pays out a 9 percent interest rate.

d) the municpal bond because it pays an equivalent after tax rate of 7.9%, while the ABC bond pays out an equivalent after tax rate of 7.65%.

e) none of the above is correct

Explanation / Answer

After tax interest rate for ABC = 9%*(1-15%) =7.65%

After tax interest rate for Municipal = 7.9%*(1-15%) = 6.72%

the ABC bond because it pays an equivalelnt after tax rate of 7.65%, while the municipal bond pays out an equivalent after tax rate of 6.72%

e) none of the above is correct

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