Question

A bank replaces 5-year corporate bonds with a coupon rate of 9.75 percent with 5-year municipal bonds with a coupon rate of 7 percent. The bank is in the 35 percent tax bracket and these bonds have the same default risk. What is the most likely reason the bank changed from the corporate to the municipal bonds?

A. Liquidity risk

B. Business risk

C. Credit risk

D. Tax exposure

E. Interest rate risk

Answer

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