Question

A corporate bond pays 9.75 percent interest. You are in the 29percent tax bracket. What is your after tax yield on this bond?

a. 2.83 percent
b. 6.92 percent
c. 7.56 percent
d. 10.39 percent
e. 13.73 percent

If your nominal rate of return is 10.71 percent and your real rateof return is 6.38 percent, what is the inflation rate?

a. 3.42 percent
b. 3.83 percent
c. 3.91 percent
d. 4.07 percent
e. 4.21 percent

A stock has a market price of $33.45 and pays a $.95 dividend. Whatis the dividend yield?

a. 1.42 percent
b. 2.84 percent
c. 5.68 percent
d. 8.52 percent
e. 11.36percent

Answer 1

Interest rate	9.75%
Tax rate	29%
After tax yield on the bond = 0.0975 (1-0.29)
After tax yield on the bond (0.0975 *0.71)	0.0692 (or) 6.92%
After tax yield on the bond	6.92%
Nominal rate of retun ( R)	10.71%
Real rate of return ( r)	6.38%
Inflation rate (h)	?
Using Fisher equation:
(1+R) = (1+r) * (1+h)
1.1071 = 1.0638 * (1+h)
(1+h) = 1.1071 / 1.0638
(1+h) = 1.040703
Inflation rate (h) = (1.040703 - 1)
Inflation rate (h) = 0.040703 (or) 4.07%
Inflation rate (h) =4.07%
Current Market Value per share	$33.45
Dividend	$0.95
Dividend Yield = $0.95 / $33.45	0.0284 (or) 2.84%
Dividend Yield = 2.84%