Reference no: EM132484302

Question a. An investor, Shirley Noirs, is in the 20% tax bracket and has been contemplating investing in corporate bonds. After a recent stay at the Eiffel Payne Hospital, a not-for-profit hospital, she learned that they will be issuing tax-exempt bonds for a major expansion. The tax-free bonds pay 6% interest. What is the minimum rate the taxable corporate bonds of the same risk must pay for Shirley to invest in them?

Question b. Now after a few years, Shirley retired and is in a 15% tax bracket. She had invested in the taxable corporate bonds at 10%, but is wondering if she might be better holding new tax-free hospital bonds that will pay 8%. Given the same level of risk, what is the minimum rate on tax-free bonds for Shirley to benefit by switching to them?

Question c. Now in a 15% tax bracket, she is considering what is best; keeping what she had invested in the taxable corporate bonds at 10%, the new tax-free hospital bonds that will pay 8%, or new taxable corporate bonds at 12%. What advice would you give her?