Question

Assume you are in the 35% tax bracket and purchase of a nickel bond of a yield of 3.2% use the formula presented in this chapter to calculate the taxable equivalent yield for this investment

Answer 1

To calculate the taxable equivalent yield for a nickel bond with a yield of 3.2% for an investor in the 35% tax bracket, we use the formula Yield / (1 - Tax Rate). The taxable equivalent yield is calculated as 4.92%.

Step-by-step explanation:

To calculate the taxable equivalent yield for the nickel bond, we need to consider the investor's tax bracket. In this case, the investor is in the 35% tax bracket. The formula to calculate the taxable equivalent yield is as follows:

Taxable Equivalent Yield = Yield / (1 - Tax Rate)

Using this formula, we can calculate the taxable equivalent yield for the 3.2% yield on the nickel bond as follows:

Taxable Equivalent Yield = 0.032 / (1 - 0.35)

Taxable Equivalent Yield = 0.032 / 0.65

= 0.0492 or 4.92%