Investor indifferent between municipal bond and taxable bond

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Reference no: EM131980560

1. New Jet Airlines plans to issue 16-year bonds with a par value of $1,000 that will pay $40 every six months. The bonds have a market price of $1,340. Flotation costs on new debt will be 7%. If the firm has a 35% marginal tax bracket, what is cost of existing debt?

2. A municipal bond has a YTM of 4.65 percent while the YTM of a comparable taxable bond is 7.51 percent. What is the tax rate that will make an investor indifferent between the municipal bond and the taxable bond?

3. The one-year spot rate z1 = 4%, the forward rate for a one-year loan beginning in one year is 6%, and the forward rate for a one-year loan beginning in two years is 8%. Find the three-year spot rate.

Reference no: EM131980560

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