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Two investors are each issued one bond with the same face value, maturity date, and yield. After both bonds have reached maturity, it is discovered that one of the bondholders received a greater total return on her investment. If all expected payments were received, which of the following could explain the difference in return?(1 point)
One of the bonds was a municipal bond while the other was a savings bond.
One of the bonds was a corporate bond while the other was a savings bond.
One of the bonds earned greater interest payments than the other.
One of the bonds was sold at face value while the other was sold below face value.
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One of the bonds was a municipal bond while the other was a savings bond.
Explanation: Municipal interest is often exempt from federal (and sometimes state) taxes, while savings-bond interest is taxable. With the same nominal yield, the municipal bond investor can have a higher after‑tax total return. The other choices don’t explain it: corporate vs. savings are both taxable (so less likely to produce this difference), unequal interest payments wouldn’t occur given the same yield/face/maturity in this context, and sale price differences aren’t relevant if both were held to maturity and all payments were received.
Explanation: Municipal interest is often exempt from federal (and sometimes state) taxes, while savings-bond interest is taxable. With the same nominal yield, the municipal bond investor can have a higher after‑tax total return. The other choices don’t explain it: corporate vs. savings are both taxable (so less likely to produce this difference), unequal interest payments wouldn’t occur given the same yield/face/maturity in this context, and sale price differences aren’t relevant if both were held to maturity and all payments were received.
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