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HW Score: 83.33%, 8.33 of 10 pts X P10.5 (similar to) Question Help An investor lives...

Question:

HW Score: 83.33%, 8.33 of 10 pts X P10.5 (similar to) Question Help An investor lives in a state with a 6% tax rate. Her fede
HW Score: 83.33%, 8.33 of 10 pts X P10.5 (similar to) Question Help An investor lives in a state with a 6% tax rate. Her federal income tax bracket is 35%. She wants to invest in one of two bonds that are similar in terms of risk and both bonds currently sell at par value). The first bond is fully taxable and offers a yield of 9.79%. The second bond is exempt from both state and federal taxes and offers a yield of 6.30%. In which bond should she invest? The after-tax yield of the first bond is %. (Round to two decimal places.) Enter your answer in the answer box and then click Check Answer 2 2 parts remaining

Answers

after tax yield of first bond = before tax yield * (1 - federal tax rate - state tax rate)

=>9.79% *(1-0.35-0.06)

=>5.78%.

He should invest in second bond since its tax free yield of 6.3% is greater than after tax yield of first bond of 5.78%.

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