A bank is considering some investment portfolio shifting. In doing so, the bank is considering selling...

A bank is considering some investment portfolio shifting. In doing so, the bank is considering selling $10,000,000 in 3 year state government bonds with a coupon interest of 2 percent, and purchasing $10,000,000 in 3 year city government bonds with a coupon interest of 3 percent issued at par. The county bonds being sold are listed at par on the bank’s books but they have a current market value of $9,000,000

Assume that the bank’s corporate income tax rate is 35 percent.

(a) Calculate the TOTAL net effect on the bank’s earnings in the current full year resulting from the shift. (12 points)

(b) Calculate the dollar income tax impact for the bank in the current year. Your answer must also indicate whether this is a tax benefit or a tax liability. (3 points)

Solutions

Expert Solution

Use a spreadsheet for the ease in computations. Enter the values and the formulas in the spreadsheet as shown in the image below.

The obtained result is provided below.

jeff jeffy answered 1 year ago

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