Essay
Consider the following securities: a fully taxable coupon bond paying 12 in one year,112 in two years,selling at 103; a fully taxable coupon bond paying 5 in one year,105 in two years,selling at 92; a municipal bond paying 8 in one year,108 in two years,selling at 98; a bank account paying 10%.
a. Which of the above securities is most attractive to an investor in the 40% effective tax bracket? (Ignore capital gains tax)
b. Which one is most attractive to a tax-exempt investor?
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Correct Answer:
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Cash flows for the investor can be ta...
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