So your customer wants to diversify her investments and wishes to include bonds in her portfolio. The

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Question:

So your customer wants to diversify her investments and wishes to include bonds in her portfolio. The bonds would include taxable and non-taxable bonds in her investment. Take a look at the following simulation and answer the questions that follow.

A $1,000, 10%, 10-year corporate bond is currently selling for $980. A customer of your is desiring 9.5% return on her investment over the full ten-year period. Your same client-customer is thinking about a tax-free municipal bond yielding a tax-free rate of 7% and she is currently assessed at a marginal tax rate of 30%. Answer the following questions:

A. What is the current yield on the corporate bond? CY = Note:CF/Price =

B. What is the % yield over the full life of the investment {do in Excel)

C. Calculate the customer's price - the price she will be willing to pay for the bond (do in Excel)

D. Would she buy the bond? Give your rationale.