1. An investor in the top 28% tax bracket is trying to decide which of two bonds to purchase. One is a corporate bond carrying an 8% coupon and selling at par. The other is a municipal bond with a 5 1/2% coupon , and it, too, sells at par. Assuming all other relevant factors are equal, which bond should the investor select?
2. What would be the initial offering price for the following bonds (assume semiannual compounding)?
a) A 15-year zero-coupon bond with a yield to maturity (YTM) of 12%
b) A 20-year zero-coupon bond with a YTM of 10%
1. Why does the present value equation appear to be more useful for the bond investor than for the common stock investor?
2. What are the important assumptions made when you calculate the promised yield to maturity? What are the assumptions when calculating promised YTC?
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