1. Assume Mr. Davis can buy either a $10,000 corporate bond yielding 10% or a municipal bond yielding 7%. Assume risk is constant. Assume also that his Federal tax rate will be 28% and his State tax rate 7% and that the municipal bond is exempt from both types of income taxes. Which should he buy, if the yield and tax consequences are the only variables?
2. A bond has the following terms: