Personal Federal income tax rate is 30%. You are trying to decide which of the following...

Personal Federal income tax rate is 30%. You are trying to decide which of the following bonds to invest in. Both are BBB rate.

1.) Kentucky Bond has a 3.2% yield.

2.) Boeing has a 4.5% yield.

Which bond would you invest in and why? Show work ... this is all the given information

Solutions

Expert Solution

tax equivalent yield = tax-free yield / (1 - tax rate)

tax equivalent yield of Kentucky Bond = 3.2% / (1 - 30%) = 4.57%

You should invest in the Kentucky Bond because it has a higher tax equivalent yield, and both bonds have equal rating.

jeff jeffy answered 2 years ago

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