Suppose that a bank currently owns a $ 5 million par value Treasury bond, purchased at par, with four years remaining to maturity that pays $ 200,000 in interest every six months. Its current market value is $ 5.23 million. If the bank sold the bond and reinvested the proceeds in a similar maturity taxable security, it could earn 6.6 percent annually. Determine the incremental cash- flow effects for the bank if it sold the Treasury note and reinvested the full after tax proceeds from the sale in a 6.6 percent three- year taxable security, assuming a 34 percent tax rate.
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