A bond issued by IBM pays 8%. A bond issued by the municipality of College Park, MD pays 6.5%. Assume that your highest marginal tax rate is 25%. Which of the following is true? (REMEMBER: the interest income from municipal bonds is tax free). a. The net rate of return for the IBM bond is higher. b. The net rate of return for the College Park bond is higher. c. None of these, there is not enough information to compute the net rates of return. d. The net rate of return for both bonds are the same.
Added by David P.
Step 1
For the IBM bond, the after-tax yield would be: 8% x (1 - 0.25) = 6% For the College Park bond, the after-tax yield would be: 6.5% Since the interest income from municipal bonds is tax-free, we don't need to adjust the yield for the College Park bond. Show more…
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