hinsafdar

A municipal bond carries a coupon of 6% and is traded at par. To a taxpayer in the 34% tax bracket, this bond provides an equivalent taxable yield of:

A) 9.09%.

B) 8.53%.

C) 6.00%.

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ETY = yield/(1 − marginal tax rate)
0.06/(1 − 0.34) = 9.09%

hinsafdar

A municipal bond selling at 12% above par offers a yield of 3.2%. A taxable Treasury note selling at an 8% discount offers a yield of 4.6%. An investor in the 32.5% tax bracket wishes to purchase an equal dollar amount of both bonds. The after-tax yield of the two-bond portfolio is closest to:

A) 4.67%.

B) 2.63%.

C) 3.15%.

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The after-tax yield of the Treasury note is the stated yield times one minus the tax rate, or 4.6% times 67.5%, or 3.1%. To calculate the portfolio yield, take the average after-tax yields of both bonds, which is 3.15%.

hinsafdar

What would the marginal tax rate have to be for an investor to be indifferent between a 6% yield on tax exempt municipal bonds and a 10% corporate bond?

A) 60%.

B) 20%.

C) 40%.

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10 = 6 / (1 − MTR )
0.10 = 0.06 / (1 – MTR); 0.10 – 0.1MTR = 0.06;
MTR = -0.04 / -0.10 = 0.40 or 40%

hinsafdar

The interest rate paid on negotiable CDs by banks in London is referred to as:

A) LIBOR.

B) the Fed Funds rate.

C) the London rate.

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The interest rate paid on negotiable CDs by banks in London is referred to as LIBOR. LIBOR is determined every day by the British Bankers Association. The Fed Funds rate is the rate paid on interbank loans within the U.S. The London rate is a fabricated term in this context.

hinsafdar

The most important LIBOR rate for funded investors is the:

A) 1 year or less rate.

B) 20 year rate.

C) 10 year rate.

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A funded investor is one who borrows to invest. These investors typically borrow short-term and the interest rate on their loan is typically short-term LIBOR plus a margin (e.g. LIBOR plus 30 basis points).

hinsafdar

A funded investor has a short-term investment returning a 7% return. The borrowing costs are 20 basis points above the reference rate. If the T-bill rate is 3% and the LIBOR rate is 3.5%, what is the investor’s current profit on this investment?

A) 3.8%.

B) 1.5%.

C) 3.3%.

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A funded investor is one who borrows to invest. These investors typically borrow short-term and the interest rate on their loan is typically short-term LIBOR plus a margin, here LIBOR plus 20 basis points. Thus in this example, the investor’s cost of funds is 3.7%. His profit is then 7% − 3.7% = 3.3%.