Question

Sandra is in the 28% tax bracket and purchased a corporate bond at par with a 12% coupon rate. What is the equivalent yield for a municipal bond?

Answer 1

Answer:

Equivalent Yield=8.64%

Explanation:

The Sandra will be getting 28% of tax benefit on its interest cost.

The equivalent yield for a municipal bond can be calculated by the Sandra Using the following formula:

Equivalent Yield=Coupon Rate(1-tax rate)

Coupon rate=12%

tax rate=28%

Equivalent Yield=12%(1-28%)

                          =12%(72%)

                           =8.64%