Question 1

Municipal bonds are yielding 4.6 percent if they are insured and 4.9 percent if they are uninsured. Your marginal tax rate is 31 percent. Your equivalent taxable yield on the insured bonds is _____ percent and on the uninsured bonds is _____ percent.

Accepted Answer

The answer of Municipal bonds are yielding 4.6 percent if...

Question 2

A $5,000 face value municipal bond matures in 14 years and is priced at $4,862. The coupon rate is 4.5 percent with interest paid semiannually. What is the yield to maturity on the bond?

Accepted Answer

Using a financial calculator:Payment = (.045 × $5,000)/2 = $112.50

Question 3

A municipal bond is yielding 4.8 percent. Jeremy has a marginal tax rate of 24 percent. What is his equivalent taxable yield?

Accepted Answer

Equivalent taxable yield = 0.048 / (1 − 0.24) = 6.32 percent

Question 4

Sonya has a marginal tax rate of 36 percent. A corporate bond is yielding 7.4 percent and a municipal bond is yielding 3.6 percent. Sonya should invest in the _____ bond because the critical marginal tax rate is _____ percent.

Accepted Answer

Critical marginal tax rate = 1 - (0.036 / 0.074) = 51 percent
Sonya should invest in the corporate bond because her marginal tax rate is lower than the critical marginal rate.

Question 5

You own a corporate bond which is yielding 8.2 percent. What is your after-tax yield if your marginal tax rate is 28 percent?

Accepted Answer

After-tax yield = .082 × (1 - .28) = 5.90 percent

Question 6

A corporate bond is yielding 6.9 percent and a municipal bond is yielding 4.8 percent. What is the critical marginal tax rate?

Accepted Answer

The critical marginal tax rate is the rate at which the after-tax yield of the corporate bond equals the yield of the municipal bond. It can be calculated using the formula: 1 - (municipal yield / corporate yield). Here, it is 1 - (4.8% / 6.9%) = 30%.

Question 7

An investor has a critical marginal tax rate of 28.5 percent when municipal bonds are yielding 5.1 percent. What is the corporate bond yield?

Accepted Answer

To find the corporate bond yield equivalent to a municipal bond yield, use the formula: Corporate Yield = Municipal Yield / (1 - Tax Rate). Here, Corporate Yield = 5.1% / (1 - 0.285) = 5.1% / 0.715 = 7.13%.

Question 8

A $5,000 face value municipal bond with a coupon rate of 3.5 percent has 13 years to maturity and a current price of $4,812. Interest is paid semiannually. What is the bond's yield to maturity?

Accepted Answer

To calculate the yield to maturity, we need to use a financial calculator or an Excel formula called "RATE." Using the given information, the calculation result is approximately 3.87 percent. Therefore, the best choice is C.

Question 9

Laura has an average tax rate of 21 percent and a marginal tax rate of 28 percent. What is her after-tax yield on a corporate bond which has a 7.6 percent yield?

Accepted Answer

To calculate the after-tax yield, we need to first determine how much Laura will actually earn after taxes on the bond.

Laura's marginal tax rate of 28 percent means that for every additional dollar she earns, 28 cents goes towards taxes. However, her average tax rate of 21 percent means that on average, she pays 21 cents in taxes for every dollar she earns.

To calculate Laura's after-tax yield on the bond, we can use the following formula:

After-tax yield = Yield x (1 - Marginal tax rate)

= 7.6% x (1 - 0.28)

= 7.6% x 0.72

= 5.472%

Therefore, Laura's after-tax yield on the corporate bond is 5.472%, or approximately 5.47%. The correct answer is C.

Question 10

The Federal Reserve is offering Treasury bills with a par value of $18 billion for sale. They have received $7 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are:  What price will Bidder A pay per bond, assuming that bid is accepted?

Accepted Answer

The answer of The Federal Reserve is offering Treasury bills...

Question 11

You own a principal STRIPS which is based on a 4.5 percent coupon Treasury bond that matures in 20 years. The STRIPS is priced at $22,868 and has a par value of $50,000. What is the yield to maturity on the STRIPS?

Accepted Answer

11ea6d0e_c3cb_94d4_b3c7_818a4ea18722_TB1223_00 The STRIPS matures in 20 years because it is based on the T-bond principal.
Calculator Solution:
 11ea6d0e_c3cb_94d5_b3c7_579021e5eb37_TB1223_00

Question 12

A STRIPS that matures in 6 years is selling for $11,369. The par value is $15,000. What is the yield to maturity?

Accepted Answer

The yield to maturity (YTM) can be calculated using the formula for the yield of a zero-coupon bond: YTM = [(Face Value / Present Value)^(1/n)] - 1, where n is the number of years to maturity. Plugging in the values: YTM = [(15000 / 11369)^(1/6)] - 1, which gives approximately 4.67 percent.

Question 13

Lester is considering a municipal bond yielding 4.4 percent and a corporate bond yielding 7.2 percent. His marginal tax rate is 36 percent. He should invest in the _____ bond because the critical marginal tax rate is _____ percent.

Accepted Answer

The answer of Lester is considering a municipal bond yielding...

Question 14

You have a marginal tax rate of 31 percent and an average tax rate of 28 percent. Municipal bonds in your area are yielding 3.6 percent. What is your equivalent taxable yield?

Accepted Answer

The answer of You have a marginal tax rate of...

Question 15

The Federal Reserve is offering Treasury bills with a par value of $30 billion for sale. They have received $11 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are:  How much money will the Federal Reserve raise from this offering?

Accepted Answer

The answer of The Federal Reserve is offering Treasury bills...

Question 16

A STRIPS has a $9,000 par value and a market value of $7,050. The time to maturity is 5 years. What is the yield to maturity?

Accepted Answer

To calculate the yield to maturity, we need to use the formula:
YTM = (C + (FV - PV) / n) / ((FV + PV) / 2)
Where C is the coupon payment, FV is the face value or par value, PV is the price or market value, and n is the number of years to maturity.

Since this is a STRIPS, there is no coupon payment. Therefore, we have:
YTM = ((FV - PV) / n) / ((FV + PV) / 2)
YTM = ((9,000 - 7,050) / 5) / ((9,000 + 7,050) / 2)
YTM = (1,950 / 5) / 8,025
YTM = 0.0385 or 3.85%
Therefore, the yield to maturity is 3.85%, which is closest to option C (4.94%).

Question 17

The Federal Reserve is offering Treasury bills with a par value of $8 billion for sale. They have received $2 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are:  How much money will the Federal Reserve raise from this offering?

Accepted Answer

The total amount of bids received is $2 billion + ($10,000 x 800,000) = $10.002 billion.

Since the Fed is only offering $8 billion in Treasury bills for sale, they will only sell $8 billion worth of Treasury bills to the highest bidders (both competitive and noncompetitive).

The highest competitive bid is 100.0104, which means the bidder is willing to pay $10,001.04 for each $10,000 par value bond.

To determine how much money the Fed will raise, we need to calculate the total value of the highest competitive bids:

$10,001.04 x 800,000 = $8,001,032,000

Adding the noncompetitive bids of $2 billion, the total amount the Fed will receive from this offering is:

$8,001,032,000 + $2,000,000,000 = $10,001,032,000

However, since they are only offering $8 billion in Treasury bills for sale, the amount they will actually raise is:

$8,000,000,000 (par value of Treasury bills offered) + $1,001,032,000 (value of highest competitive bids) = $9,001,032,000

Therefore, the correct answer is (B) $7.88 billion.

Question 18

Municipal bonds are yielding 4.8 percent currently. Alicia has a marginal tax rate of 35 percent and Yvonne has a marginal tax rate of 22 percent. Alicia's equivalent taxable yield is _____ percent and Yvonne's is _____ percent.

Accepted Answer

To calculate the equivalent taxable yield for Alicia and Yvonne, we can use the following formula:

Equivalent Taxable Yield = Municipal Bond Yield / (1 - Marginal Tax Rate)

For Alicia: 
Equivalent Taxable Yield = 4.8% / (1 - 0.35) = 7.39%

For Yvonne: 
Equivalent Taxable Yield = 4.8% / (1 - 0.22) = 6.15%

Therefore, the best choice is B, as it correctly shows both equivalent taxable yields.

Question 19

Jeff owns a taxable bond portfolio which is yielding 8.76 percent. His after-tax yield is 6.57 percent. What is his marginal tax rate?

Accepted Answer

0.0657 = 0.0876 × (1 − x); x = 25 percent

Question 20

A STRIPS has a yield to maturity of 7.2 percent, a par value of $25,000, and a time to maturity of 12 years. What is the price?

Accepted Answer

The answer of A STRIPS has a yield to maturity...

Quiz 19: Government Bonds

Municipal bonds are yielding 4.6 percent if they are insured and 4.9 percent if they are uninsured. Your marginal tax rate is 31 percent. Your equivalent taxable yield on the insured bonds is _ percent and on the uninsured bonds is _ percent.

A $5,000 face value municipal bond matures in 14 years and is priced at $4,862. The coupon rate is 4.5 percent with interest paid semiannually. What is the yield to maturity on the bond?

A municipal bond is yielding 4.8 percent. Jeremy has a marginal tax rate of 24 percent. What is his equivalent taxable yield?

Sonya has a marginal tax rate of 36 percent. A corporate bond is yielding 7.4 percent and a municipal bond is yielding 3.6 percent. Sonya should invest in the _ bond because the critical marginal tax rate is _ percent.

You own a corporate bond which is yielding 8.2 percent. What is your after-tax yield if your marginal tax rate is 28 percent?

A corporate bond is yielding 6.9 percent and a municipal bond is yielding 4.8 percent. What is the critical marginal tax rate?

An investor has a critical marginal tax rate of 28.5 percent when municipal bonds are yielding 5.1 percent. What is the corporate bond yield?

A $5,000 face value municipal bond with a coupon rate of 3.5 percent has 13 years to maturity and a current price of $4,812. Interest is paid semiannually. What is the bond's yield to maturity?

Laura has an average tax rate of 21 percent and a marginal tax rate of 28 percent. What is her after-tax yield on a corporate bond which has a 7.6 percent yield?

The Federal Reserve is offering Treasury bills with a par value of $18 billion for sale. They have received $7 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are: What price will Bidder A pay per bond, assuming that bid is accepted?

You own a principal STRIPS which is based on a 4.5 percent coupon Treasury bond that matures in 20 years. The STRIPS is priced at $22,868 and has a par value of $50,000. What is the yield to maturity on the STRIPS?

A STRIPS that matures in 6 years is selling for $11,369. The par value is $15,000. What is the yield to maturity?

Lester is considering a municipal bond yielding 4.4 percent and a corporate bond yielding 7.2 percent. His marginal tax rate is 36 percent. He should invest in the _ bond because the critical marginal tax rate is _ percent.

You have a marginal tax rate of 31 percent and an average tax rate of 28 percent. Municipal bonds in your area are yielding 3.6 percent. What is your equivalent taxable yield?

The Federal Reserve is offering Treasury bills with a par value of $30 billion for sale. They have received $11 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are: How much money will the Federal Reserve raise from this offering?

A STRIPS has a $9,000 par value and a market value of $7,050. The time to maturity is 5 years. What is the yield to maturity?

The Federal Reserve is offering Treasury bills with a par value of $8 billion for sale. They have received $2 billion of noncompetitive bids. The competitive bids for a $10,000 par value bond are: How much money will the Federal Reserve raise from this offering?

Municipal bonds are yielding 4.8 percent currently. Alicia has a marginal tax rate of 35 percent and Yvonne has a marginal tax rate of 22 percent. Alicia's equivalent taxable yield is _ percent and Yvonne's is _ percent.

Jeff owns a taxable bond portfolio which is yielding 8.76 percent. His after-tax yield is 6.57 percent. What is his marginal tax rate?

A STRIPS has a yield to maturity of 7.2 percent, a par value of $25,000, and a time to maturity of 12 years. What is the price?