Would invest in municipal bonds or corporate bond and why

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Reference no: EM132762831

You are the Vice-President of Mayan Corporation, a financing company. You plan to invest the company funds in long-term bonds. You have P600 million to invest in. You may purchase highly rated municipal bonds at par with a coupon rate of 6%. Moreover, you also have a choice of maturity between 10 years or 20 years. Alternatively, you could purchase highly rated corporate bonds at par with a coupon rate of 8%. These bonds also are offered with maturities of 10 years or 20 years. You do not expect to need the funds for five (5) years. At the end of the fifth year, you will sell the bonds because you will need to make a large purchase at that time.

Problem a. What is the annual interest you would earn, before taxes, on the municipal bond? On the corporate bond?

Problem b. If the level of credit risk and the liquidity for the municipal and corporate bonds are the same, would you invest in the municipal bonds or the corporate bonds? Why?

Reference no: EM132762831

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