Daniyal Ali [18u00265]

Assignment 1

Investments

Q1- Assuming an investor is in the 25% tax bracket, what taxable equivalent yield must be earned
on a municipal bond with a yield of 7.5%?

Taxable equivalent yield = tax-exempt municipal yield 1.0 - marginal tax rate

The taxable equivalent yield for a tax-exempt yield of 7.5%, for an investor in a 25% tax bracket, is:
Taxable equivalent yield = .075 / [1-.25]= 10%

Q2- Assuming an investor is in the 15% tax bracket, other things equal, after taxes are paid would
this investor prefer a corporate bond paying 8% or a municipal bond paying 6.5%?

Corporate bond yields are 0.08 (1-.15) = 6.8% (this is greater than 6.5%), therefore, we will choose
the corporate bond yield.

The municipal bond has a taxable equivalent yield of .065 / [1 - .15] = 7.65% (this is lower than 8%),
hence, we will select corporate bond yield.

Q3-- Assuming an investor is in the 15% federal tax bracket and faces a 6% marginal state tax rate.
What is the combined TEY for a municipal bond paying 5.5%?

Effective state rate= 0.06(1-0.15)= 5.1%

Combined effective fed/st tax rate= 0.051+0.15= 0.201

Combined TEY= 0.055/(1-0.201)= 0.0688 (6.88%)

Q4- Given the information in the first and third columns, complete the table below.

Quoted Price Price per $1 par value Par value Dollar price
(rounded)
98 1/16 .9806 $1,000 980.625
102 7/8 1.0288 $5,000 5123.75
109 9/16 1.0956 $10,000 10956.25
86 11/32 0.8634 $100,000 86343.75

Q5- For each of the following issues, indicate whether the price of the issue should be par value,
above par value or below par value? Fill in the fourth coloumn.

Issue Coupon rate Required yield by Price

the market
a. A 7 ¼% 7.25% At PAR
b. B 8 3/8 % 7.15% Above PAR
c. C 0% 6.20% Below PAR
d. D 5 7/8% 5.00% Above PAR
e. E 4 ½% 4.50% At PAR