NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities
Caselet: Mr Kapoor is in the 30% tax bracket and compares a taxable bond yielding 9% with a tax-free bond. Ignoring cess and surcharge, what tax-free yield would make him indifferent between the two?
The tax-free yield that makes him indifferent is 6.30%. Multiply the taxable yield of 9% by one minus the 30% tax rate, giving 9% x 0.70. A tax-free bond offering this matches the post-tax return of the taxable bond.
- A2.70%
- B6.30%Correct
- C7.00%
- D9.00%
Explanation
Post-tax equivalent = 9% x (1 - 0.30) = 6.30%. 2.70% is the tax amount only. 9% ignores tax entirely, and 7.00% is not derived from the data.
Did you get it right without looking?
One question tells you little. A timed set on Investing in Fixed Income Securities shows your real accuracy, how long you take and where you lose marks.
More Investing in Fixed Income Securities questions
- A bond has a modified duration of 4.5. A client holds Rs 20,00,000 of this bond at market value. If the yield rises by 50 basis points, what…
- Which of the following best describes the current yield of a bond?
- Mr. Iyer holds a bond with a modified duration of 5. If market yields rise by 50 basis points, the approximate change in the bond's price is…
- A bond with a face value of Rs 1,000 pays an annual coupon of 8% and is currently priced at Rs 800. What is its current yield?
- Which of the following risks is the main concern for a holder of a callable bond when interest rates fall sharply?
- Which of the following best describes the relationship between a bond's modified duration and its price sensitivity to interest rates?