Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
7th Edition
ISBN: 9780357033609
Author: Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher: Cengage Learning
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Textbook Question
Chapter 12, Problem 7FPE
An investor in the 22 percent tax bracket is trying to decide which of two bonds to select: one is a 5.5 percent U.S. Treasury bond selling at par; the other is a municipal bond with a 4.25 percent coupon, which is also selling at par. Which of these two bonds should the investor select? Why?
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You are given the following details of three default free government bonds. Assume that one can take long (buy) and short (sell) positions in these bonds. CF stands for cash flow.
Bond
Current price Today
CF Year 1
CF Year 2
A
95.24
100
0
B
89.85
0
100
C
X
70
1070
Assuming that the current market prices of Bond A and Bond B are correct, then, what should be the current theoretical (fundamental) price of Bond C, as per the no-arbitrage principle, i.e., what is the value of X?
[Do not round-off any numbers. If at all you want to round-off a number, round it off at 8 decimal places.]
Consider the case of an investor, Nazim:
Nazim wants to include putable bonds in his investment portfolio. Nazim is likely to put the bonds when:
He is in need of cash.
He expects to use the cash when the bond matures.
Nazim also recently bought bonds with a clause stating that interest will be paid based on the inflation rate. When the inflation rate increases, the interest on the bonds will also increase. Nazim has invested in .
The coupon rate on a tax-exempt bond is 5.6%, and the rate on a taxable bond is 8%. Both bonds sell at par. At what tax bracket (marginal tax rate) would an investor be indifferent between the two bonds?
Chapter 12 Solutions
Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)
Ch. 12 - Describe the various types of risks to which...Ch. 12 - Prob. 2LOCh. 12 - Prob. 3LOCh. 12 - Prob. 4LOCh. 12 - Prob. 5LOCh. 12 - Prob. 6LOCh. 12 - What makes for a good investment? Use the...Ch. 12 - An investor is thinking about buying some shares...Ch. 12 - The price of Outdoor Designs, Inc. is now 85. The...Ch. 12 - The Castle Company recently reported net profits...
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