Ms. Roxanne is interested in investing in U.S. Treasury bills and municipal bonds. Consider
the securities below:-
U.S. Treasury bills
Face value : $1,000,000
Maturity : 90 days
Quotation : $988,000
U.S. Municipal Bonds
Face value : $1,000,000
Maturity : 90 days
Yield to maturity : 4.2%
Required:
(i) Calculate the bond equivalent yield for the U.S. Treasury bills. (4 marks)
(ii) “The yield on municipal bonds is less than Treasuries with the same maturity, but
municipal bonds generally are riskier than treasuries.”
Discuss and comment on the above statement. (10 marks)
(iii) Assume Ms. Roxanne is in the 40% marginal tax bracket.
Explain which investment is preferable for Ms. Roxanne. Support your answer with
relevant calculations. (6 marks)
the securities below:-
U.S. Treasury bills
Face value : $1,000,000
Maturity : 90 days
Quotation : $988,000
U.S. Municipal Bonds
Face value : $1,000,000
Maturity : 90 days
Yield to maturity : 4.2%
Required:
(i) Calculate the bond equivalent yield for the U.S. Treasury bills. (4 marks)
(ii) “The yield on municipal bonds is less than Treasuries with the same maturity, but
municipal bonds generally are riskier than treasuries.”
Discuss and comment on the above statement. (10 marks)
(iii) Assume Ms. Roxanne is in the 40% marginal tax bracket.
Explain which investment is preferable for Ms. Roxanne. Support your answer with
relevant calculations. (6 marks)
