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Bonds and Bond Valuation

Bonds and Bond Valuation

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Published by kawall

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Published by: kawall on Aug 29, 2009
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12/16/2012

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•A taxable bond has a yield of 8% and a municipal
bond has a yield of 6%

–If you are in a 40% tax bracket, which bond do you
prefer?

•8%(1 - .4) = 4.8%
•The after-tax return on the corporate bond is 4.8%, compared
to a 6% return on the municipal

–At what tax rate would you be indifferent between the
two bonds?

•8%(1 – T) = 6%
•T = 25%

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