How do zero-coupon securities, such as Treasury strips, provide returns to investors? How are the returns taxed?
Answer to relevant QuestionsIf an investor is in a 34 percent marginal tax bracket and can purchase a municipal bond paying 7.25 percent, what would the equivalent before-tax return from a nonmunicipal bond have to be to equate the two? If an investor is in a 30 percent marginal tax bracket and can purchase a straight (nonmunicipal bond) at 8.37 percent and a municipal bond at 6.12 percent, which should he or she choose? Review the instructions in problem 8. Now assume as alternative A you are considering a $10,000 par value Treasury strip that matures in 20 years. The discount rate is 6 percent. You also are considering alternative B, which ...Explain the benefits derived from investing in deep discount bonds. What is the approximate yield to maturity of a 14 percent coupon rate, $1,000 par value bond priced at $1,160 if it has 16 years to maturity?
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