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a. Kim's after-tax yield on the bonds is 7.2%. This is calculated by taking the 12% interest rate and subtracting 40% of that (4.8%) to get the after-tax yield.
b. Kim should buy the Twin Cities bonds, since the after-tax yield on the tax-exempt bonds is 6%, which is higher than the after-tax yield on the HCA bonds (7.2%).
c. Kim would be indifferent between the two bonds if the interest rate on the Twin Cities bonds was 8.4%. This is calculated by taking the 12% interest rate on the HCA bonds and subtracting 40% of that (4.8%) to get the after-tax yield (7.2%), and then adding the difference between the two yields (1.2%) to the Twin Cities bond rate (6%).
Kim Davis is in the 40% personal tax bracket. She is considering investing in HCA (taxable) bonds that carry a 12% interest rate.
a. What is her after-tax yield (interest rate) on the bonds?
b. Suppose Twin Cities Memorial has issued tax exempt bonds that have an interest rate of 6%. With all else the same, should Kim buy the HCA or the Twin Cities bonds?
c. With all else the same, what interest rate on the tax-exempt Twin Cities bonds would make Kim indifferent between these bonds and the HCA bonds?
Please help I am lost
1 answer