You must show your work and label all graphs carefully and legibly.Not showing your work will get you zero points on the question, even if your answer is correct. (26 points)
a.Assume the nominal interest rate is 17 percent and the expected rate of inflation is
Do the following present value problems.You must set up all present value problems before
Draw and label the bond market graph covered in chapter 5.Then, using the graph,
Suppose the interest rate on a taxable corporate bond is 4 percent while a municipal, tax exempt bond has an interest rate of 3 percent, and they are similar in every other way.
Assuming the income tax rate is 30 percent, calculate the after tax interest rate on the corporate bond. Is it higher or lower than the after tax return on the municipal bond?
What is the income tax rate that equalizes the after tax return between the corporate bond and the municipal bond.
Sample Solution