A bank is considering two securities: a 30-year Treasury bond yielding 6 percent and a 30-year municipal bond yielding 5 percent

Finance Oct 30, 2020

A bank is considering two securities: a 30-year Treasury bond yielding 6 percent and a 30-year municipal bond yielding 5 percent.

a. If the bank's tax rate is 40 percent, calculate the Treasury bond's after-tax yield. (Round your answer to 2 decimal places. (e.g., 32.12))

After-tax yield _________ %

b. Which bond offers the higher after-tax yield?

Municipal bond

Treasury bond

Expert Solution

a) Computation of Treasury Bond's After-tax Yield:

After-tax Yield = 6% * (1 - 0.40) = 3.60%

b) The 30 year municipal bond offers the better deal since its yield is 5% and the municipal bond after tax yield is 3.60% which is less than the yield of municipal bond.

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