A 9 percent coupon bond issued by the State of Pennsylvania sells for $1,000 and thus provides a 9 percent yield to maturity.What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 28 percent tax bracket?

Question

Quizplus · Accepted Answer

The after-tax return on the State of Pennsylvania bond is 9% * (1 - 0.28) = 6.48%. To find the yield on the Synthetic Chemical Company bond that would provide the same after-tax return, we solve for the yield (Y) in the equation 6.48% = Y * (1 - 0.28). Solving for Y gives Y = 6.48% / (1 - 0.28) = 9% / (1 - 0.28) = 12.50%.

A 9 Percent Coupon Bond Issued by the State of Pennsylvania