Question

Which two factors must Roger consider when calculating the taxable equivalent yield for a municipal bond?A. The bond has a tax-free yield of 5%.B. Roger’s investment income increases an average of 7% each year.C. Roger has realized long-term capital gains that qualify for a tax rate of 0%.D. Roger owns stock that pays a 4% dividend.E. Roger is in the 24% tax bracket.F. Roger was in the 22% tax bracket last year. What factors must Roger consider when calculating the taxable equivalent yield for a municipal bond?

a) A and B
b) C and D
c) D and E
d) A and F

Answer 1

The taxable equivalent yield of a municipal bond for Roger is determined by considering the bond's tax-free yield (A) and his current tax bracket (E), which is 24%, resulting in the correct combination being A and E.

Step-by-step explanation:

When calculating the taxable equivalent yield for a municipal bond, Roger must consider factors that are directly related to the taxation of the income from the bond. The two factors that are relevant to this calculation are:

• The bond’s tax-free yield.
• Roger’s tax bracket.

Therefore, the correct answer is A) and E): the bond has a tax-free yield of 5% and Roger is in the 24% tax bracket. The taxable equivalent yield is calculated to compare the yield on a tax-free bond to a taxable bond for someone in a specific tax bracket. Roger’s current tax bracket is vital for accurately assessing the equivalent yield he would need from a taxable bond to match the after-tax return of a municipal bond.