Martin is trying to decide which one of the following bonds he should purchase.All the bonds have the same maturity date and all have approximately the same level of risk.The general level of interest rates is declining.Martin is in the 33 percent federal income tax bracket and the 8 percent state income tax bracket.The municipal bonds are from his home state.

Which bond should Martin purchase if he wishes to hold it for the long term?

Question

Martin is trying to decide which one of the following bonds he should purchase.All the bonds have the same maturity date and all have approximately the same level of risk.The general level of interest rates is declining.Martin is in the 33 percent federal income tax bracket and the 8 percent state income tax bracket.The municipal bonds are from his home state.

Which bond should Martin purchase if he wishes to hold it for the long term?

Quizplus · Accepted Answer

Martin should purchase Bond C, which is a municipal bond from his home state. Municipal bonds are exempt from federal income tax and, in some cases, state income tax. Since Martin is in the 33 percent federal income tax bracket and the 8 percent state income tax bracket, purchasing a municipal bond will allow him to keep more of his income compared to purchasing a taxable bond. Additionally, with the general level of interest rates declining, it is advantageous for Martin to purchase a bond with a fixed interest rate before rates fall further.

Martin Is Trying to Decide Which One of the Following