1. What is the discount yield, bond equivalent yield, and effective annual return on a $1 million T-bill that currently sells at 97 3/8 percent of its face value and is 55 days from maturity? (Use 360 days for discount yield and 365 days in a year for bond equivalent yield and effective annual return. Do not round intermediate calculations. Round your answers to 3 decimal places. (e.g., 32.161))
Discount yield %
Bond equivalent yield %
Effective annual return %
2. You can invest in taxable bonds that are paying a yield of 8.2 percent or a municipal bond paying a yield of 6.75 percent. Assume your marginal tax rate is 21 percent.
a. Calculate the after-tax rate of return on the taxable bond? (Round your answer to 2 decimal places. (e.g., 32.16))
Rate of return %
b. Which security bond should you buy?
Taxable bonds that are paying a 8.2 percent annual rate of return.
Municipal bond paying a 6.75 percent annual rate of return.
3. A client in the 30 percent marginal tax bracket is comparing a municipal bond that offers a 4.5 percent yield to maturity and a similar risk corporate bond that offers a 6.25 percent yield. Which bond will give the client more profit after taxes?
Municipal bond
Corporate bond