Reggie White, Jack the Treasurer, Cash Manager Ken
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(1) Reggie White, a corporate treasurer, is trying to decide which two 1-year securities to purchase: a negotiable CD with nominal yield of 6 percent or a municipal security with a nominal yield of 4.5 percent. The issuing municipality is not in the same state as Reggie's company, but he recognizes the muni's interest is exempt from federal taxation. His company's marginal federal tax rate is 39 percent. Which security should the treasurer select, assuming the securities have equal default risk?
(2) Jack, a treasurer, assistance, is considering the purchase of municipal note but needs to compare their tax- advantage yield with the yield on taxable securities. The company's federal tax rate is 34 percent. (a) What advice would you give Jack about comparing these securities? (b) If he's considering a muni that Is yielding 5 percent, how high must the taxable rate be to provide a higher after-tax yield on the taxable security?
(3) Cash Manager Ken just picked up the financial newspaper and is having trouble understanding the jargon. He notices that at a Treasury auction of 13 week treasury bills the lowest price bid for $10,000 bill was 97.569 percent of par. Can you help Ken understand the various yield calculation? (a) What is the discount yield on these securities? (b) What is the coupon-equivalent yield on the Treasury bill? (c) What is the annual effective yield on the Treasury bills? (d) Comment on the relationship between the results you got in a through c.
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Solution Summary
Securities for equal default risks are examined.
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QUESTIONS
(1) Reggie White, a corporate treasurer, is trying to decide which two 1-year securities to purchase: a negotiable CD with nominal yield of 6 percent or a municipal security with a nominal yield of 4.5 percent. The issuing municipality is not in the same state as Reggie's company, but he recognizes the muni's interest is exempt from federal taxation. His company's marginal federal tax rate is 39 percent. Which security should the treasurer select, assuming the securities have equal default risk?
(2) Jack, a treasurer, assistance, is considering the purchase of municipal note but needs to compare ...
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