Homework Answers
Answer to Question no 23 - Option (c)
Treasury bonds are full tax free at state and local level but fully taxable at federal income tax return. So, post tax yield on treasury bond = 4.7*(1-30%)=4.7*0.7= 3.29%.
The interest earned on corporate bond is subject to both federal and state tax. So effective tax rate will be =30+8=38%.
Hence, post tax yield on corporate bond = 4.9*(1-38%)=4.9*0.62 = 3.04%.
Louisiana Municipal bonds will be tax free so effective yield on Louisiana Municipal bonds will be 3.5%.
Hence, answer to this question will be (c) 3 only i.e highest post yield will be on Louisiana Municipal bonds.
Answer to Question no 24. - Option d
Zero coupon bond does not pay any interest they are issued at discount and redeemed at par. So, if interest rate increase price of bond drop almost by double. Hence answer to this question would be Option d.
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