Series 7 Exam Question 168: Answer and Explanation

Question: 168

Jake Hanson lives in New York and is considering purchasing a bond. He has settled on either a 5 percent municipal bond offered by New York or a 7 percent corporate bond offered by The Greenhorn Corporation, which has headquarters in New York. Jake needs some guidance and you would like you to help him determine which bond will provide him with the greatest return. Which of the following information do you need to obtain before you can make the appropriate recommendation?

• A. The business of his employer
• B. His current tax bracket
• C. How long he has lived in New York
• D. His other holdings

Correct Answer: B

Explanation:

B. In order to determine the best investment for Jake, you must do a tax-equivalent yield (TEY) calculation. To accomplish this, you need to know Jake's tax bracket. Remember, the interest received from municipal bond investments is tax-free, and investors in higher tax brackets save more money by investing in municipal bonds when compared to other investments. The Series 7 examiners are testing you to make sure you know that the other items listed here are not relevant to the question.