A taxpayer is considering buying a fully taxable corporate

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A taxpayer is considering buying a fully taxable corporate bond. The bond has a remaining maturity of 5 years, promises to pay 6% interest annually, and has a face value of $1,000. the taxpayer faces a 31% tax rate on the interest income and requires a pretax rate of return of 6% to invest. What price is the taxpayer willing to pay for this bond?

b. The same taxpayer is also considering buying a tax-exempt municipal bond. The municipal bond has a remaining maturity of 5 years, also promises to pay 6% intererst annually, and has a face value of $1,000. Assume the corporate and municipal bonds are equally risky. At what price is the taxpayer indifferent between the corporate and municipla bond?

Reference no: EM13581431

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