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Assume Mr. Davis can buy either a $10000 corporate bond yielding 10% or a municipal bond yielding 7%. Assume risk is constant. Assume also that his Federal tax rate will be 28% and his State tax rate 7% and that the municipal bond is exempt from both types of income taxes. Which should he buy if the yield and tax consequences are the only variables A bond has the following terms:Principal amount$1000Semi-annual interest$50Maturity10 years (When asked for a % yield round yields to nearest tenth of a percent such as 10.1 %.) You purchase a high-yield junk bond for $1000 that pays $140 annually. After buying the bond yields decline and you are able to reinvest the interest at only 9 percent. You reinvest all the interest payments. How much will you have when the bond is retired after 12 years? What was the annual return you earned on this investment? Determine the current market prices of the following $1000 bonds if the comparable rate is 10% and answer the questions.
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