Question

Assume you are in the 35 percent tax bracket and purchase a municipal bond with a yield of 7.25 percent. Use the formula presented in chapter 11 of your textbook 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

before tax corportate bond equivalent: 11.15%

Step-by-step explanation:

The municipal bond are tax-free making them more attractive than normal corporate bonds.

thus, the municipal bond rate should be compare with the after tax rate of a corporate bond:

before tax rate ( 1 - tax rate) = after tax rate

For this case:

the after tax rate is 7.25%

and the tax bracket is 35%

before taxes ( 1 - 0.35) = 0.0725

0.0725/.65 = 0,1115384 = 11.15%