Bond B, issued by the Town of Blacksburg, pays a 3.5% interest rate that is full
ID: 2425140 • Letter: B
Question
Bond B, issued by the Town of Blacksburg, pays a 3.5% interest rate that is fully tax-exempt. Bond C, issued by a corporation, pays interest at 6% and is entirely taxable. Bond G, issued by the U.S. government, pays interest at 5% and is entirely taxable. Bond B and Bond G have identical risk. Bond C is more risky than the other bonds. On all other dimensions (e.g., maturity) the three bonds are identical, and all three bonds trade at face value. If you invest $10,000 in Bond B, what amount of implicit tax will you pay?
Explanation / Answer
As Bond B is fully tax exempt , hence investor does not need to pay any tax to Government .