Question

A municipal bond carries a coupon rate of 6.50% and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 35% combined tax bracket

Answer 1

10%

Step-by-step explanation:

Formula for computation of equivalent taxable yield is r = rm/1-t. Where the tax rate is t, rm is Yield on municipal bond and r is Tax equivalent yield

r = rm/1-t

r = 6.50% / 1 - 35%

r = 6.50% / 0.65%

r = 10%

So, the equivalent taxable yield of this bond to a taxpayer in a 35% combined tax bracket is 10%