A. You buy a $10,000 par 90 day T-bill that has a bank discount quote of 2.9%. T

Question

A. You buy a $10,000 par 90 day T-bill that has a bank discount quote of 2.9%. This bill's cost would be

B. A municipal bond has a promised yield to maturity of 3.62%. For an investor in a 32% tax bracket this municipal bond has the same effective yield as an equivalent corporate bond with a _____ promised yield to maturity

C.A corporation buys preferred stock at $70, holds it one year and sells it at $70 after collecting a $5 dividend. The firm's tax rate is 33%. The firm's after tax rate of return is ______.

Explanation / Answer

1. Bill's cost = Par Value/(1+ YTM* 90/365) = 1000/( 1+ 2.9%*90/360) = 992.802
2. Corporate bond rate* ( 1 -tax rate) = YTM of Municipal Bond
Corporate bond rate = 3.62/(1-32%) = 5.32%
3. Return on preferred stock after tax = ( Sales price + dividend - Cost price )(1-tax rate)/Cost price =
5*(1-33%)/70 = 4.79%

Best of Luck. God Bless

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