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Assume that you are in the 40% federal-plus-state marginal tax
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Assume that you are in the 40% federal-plus-state marginal tax bracket and that capital gains taxes are deferred until maturity.  Assuming equal investment risk and a horizontal yield curve, rank the following investment opportunities on the basis of the effective annual yields:

a.    A $100 par value perpetual preferred stock with an annual coupon of 12%, quarterly payments, and selling at $105.

b.   A $1,000 par value, 20-year, non callable, semiannual bond with a coupon of 12% currently selling at $1,050.

A $1,000 par value, 20-year, non callable, semiannual bond with a coupon of 6% selling at a price of $637.

How would the situation change if the ranker had been:

a pension fund investment manager or

a corporation that is in the 40% federal-plus-state bracket?

Part d - Explain in words but demonstrate that you could quantify your answer.

Please show all relevant work, equations, and calculations so that I understand the procedure.

 







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