Problem:
John Friedman is in the 40 percent personal tax bracket. He is considering investing in HCA bonds that carry a 12 percent interest rate.
Required:
Question 1: What is his after-tax yield (interest rate) on the bonds?
Question 2: Suppose Twin Cities Memorial Hospital has issued tax-exempt bonds that have an interest rate of 6 percent. With all else the same, should john buy the HCA or he Twin Cities bonds?
Question 3: With all else the same, what interest rate on the tax-exempt Twin Cities bonds would make john indifferent between these bonds and the HCA bonds?
Note: Provide support for your rationale.