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$80
$900=
$80
$950
+
+
(1+HPY)1 (1+HPY)2 (1+HPY)2
tax status and local government bonds : For banks in the upper tax brackets, taxexempt state and local government (municipal) bonds and notes have been attractive
from time to time, depending upon their status in tax law.
For example, suppose that Aaa-rated corporate bonds are carrying an average gross
yield to maturity of 7 percent, the prime rate on top-quality corporate loans is 6
percent, and Aaa-rated municipal bonds have a 5.5 percent gross yield to maturity. The
investment officer for a financial firm subject to the corporate income tax could
compare each of these potential yields using this formula :