Question 976955: blaze Bledsoe is in a 33% tax bracket. Blaze is considering purchasing some bonds. He can purchase tax-exempt bonds offered by Baptist health system that have an interest (coupon) rate of 6 1/4%. or he can purchase community health systems taxable bonds that pay 10 1/4% interest annually. Given that the risk is the same on the two bonds, which one should Blaze purchase and why
Answer by jim_thompson5910(35256)   (Show Source):
You can put this solution on YOUR website! Let's assume each bond's face value is $1000
Baptist Health System:
(6 & 1/4)% of 1000 = 0.0625*1000 = 62.50
No taxes paid since these bonds are tax exempt
Community Health Systems:
(10 & 1/4)% of 1000 = 0.1025*1000 = 102.50
33% of 102.5 = 0.33*102.5 = 33.825 = 33.83 in taxes paid
102.50 - 33.83 = 68.67
With the Baptist Health System bond, he nets $62.50 per year in coupon payments.
With the Community Health Systems bond, he nets $68.67 per year in coupon payments.
Both have the same amount of risk, so Blaze should choose the Community Health Systems bond.
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