Question:
"You are running a global company, and the prime rate in the US just hit an all time high of apprx. 21%. You are told by your treasurer that: CD rates are 21%, triple tax free muni bonds are paying 15%, but the Chinese economy is booming. Obviously the best opportuninty would be to buy insured triple taxi bond., bc your company is a new company with yound shareholders." True or false? Wow, my proffesor asked us this and i dont even know what it means! Any help would be great!
Answers:
You've lost me here! What have the Chinese got to do with this?
Interest on CD's is taxable as ordinary income. The top corporate bracket is 35%. The muni pays less but the income is tax free. So, the question becomes which is the better investment - the CD or the muni. The after tax return on the CD is 21% less the taxes or 21% less 35% of 21%. This works out to be 13.65%, so the muni is a better deal.
As an aside if interest rates fall the muni bond will rise in value. Take this as an article of faith: Bond prices rise as interest rates fall and vice versa.
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