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You are planning to buy a bond and are considering 2 options. Your one requirement...

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Accounting

You are planning to buy a bond and are considering 2 options. Your one requirement is that you need to buy the lower price bond. Your desired nominal yield after tax is 4%, convertible semi-annually.

The details of the 2 bonds under consideration are as follows:

  • A corporate bond with a 10,000 par value, a 4 year term, and a coupon rate of 6% payable semi-annually. The tax rate applicable on corporate bond coupon payments is 30%. The bond will be held to maturity, at which time a capital gain or loss is realized. The capital gains tax rate is 0%.
  • A municipal bond with a 10,000 par value, a 4 year term, and a coupon rate of 4% payable semi-annually. The tax rate on municipal bond coupon payments is zero. The bond will be held to maturity, at which time a capital gain or loss is realized. The capital gains tax rate is 0%.

Find the price of both bonds. Which one will you purchase?

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