Question

1a.An investor is in the 28 percent federal tax bracket. For this investor, a municipal bond paying 4 percent interest is equivalent to a corporate bond paying ________ interest.

A. 11.79 percent

B. 10.17 percent

C. 9.08 percent

D. 9.68 percent

E. 5.56 percent

1b. Which of the following situations would require a decrease in the coupon rate for a bond selling at par?

A. The addition of a call provision

B. The addition of a convertibility option

C. The increase in the rating from BBB to AA

D. The addition of sinking fund provision

E. All of these choices are correct.

1c.A borrower took out a 30-year fixed-rate mortgage of $2,250,000 at a 7.2 percent annual rate. After ten years, she wishes to pay off the remaining balance. By then, interest rates have fallen to 7 percent. How much does she have to pay to retire the mortgage (to the nearest dollar)?

A. $2,122,426

B. $2,225,330

C. $2,015,678

D. $2,212,041

E. $1,939,765

Answer 1

1a. Equivalent Yield of Corporate Bond = Municipal Bond Yield / (1 - Tax) = 4% / (1 - 28%) = 5.56% Option E

1b. Option E is correct All of these choices are correct. because all the options will result in reduction of coupon rate

1c. Balance of Mortgage after 10 years = $1939765 Option E