Question

assume you are in the 33 percent tax bracket and purchase a municipal bond with a yield of 6.25 percent. use the formula presented in this chapter to calculate the taxable equivalent yield for this investment. (do not round intermediate calculations. enter your answer as a percent rounded to 2 decimal places.)

Answer 1

The taxable equivalent yield would be equal to 9.38% using the formula from the chapter.

The taxable equivalent yield formula is calculated by dividing the tax-free yield by one minus the tax rate. For this example, the taxable equivalent yield would be calculated as follows:

Taxable Equivalent Yield = 6.25% / (1 - 0.33)

Taxable Equivalent Yield = 9.38%

Therefore, the taxable equivalent yield for this investment would be 9.38%, rounded to 2 decimal places. This means that if the investor were to purchase a taxable bond yielding 9.38%, the after-tax yield would be the same as the 6.25% yield of the municipal bond.

This is an important concept to understand, as it allows investors to compare the after-tax yields of tax-exempt and taxable investments.

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