Answer:
Tax equivalent yield = 38.5%
Explanation:
Return on a municipal bond = 2.5%
Since municipal bonds are non taxable, for a similar taxable bond, tax equivalent yield is :
Tax equivalent yield = Yield on municipal bond / (1 - tax rate)
Tax equivalent yield = 2.5% / ( 1 - 0.35)
Tax equivalent yield = 0.025 / 0.65
Tax equivalent yield = 0.03846154
Tax equivalent yield = 38.5%
