Question

Assume you are in the 30 percent tax bracket and purchase a 4.60 percent, tax-exempt municipal bond. Calculate the taxable equivalent yield for this investment using the formula: Taxable equivalent yield = Tax-exempt return /(1 - Your tax rate )

Answer 1

The taxable equivalent yield for a tax-exempt municipal bond with a 4.60% yield for someone in the 30 percent tax bracket is 6.57%, calculated using the formula provided.

Step-by-step explanation:

To calculate the taxable equivalent yield for a tax-exempt municipal bond when you are in the 30 percent tax bracket and the bond has a 4.60 percent yield, you can use the formula:

Taxable equivalent yield = Tax-exempt return / (1 - Your tax rate)

Plugging in the numbers:

Taxable equivalent yield = 4.60% / (1 - 0.30)

Taxable equivalent yield = 4.60% / 0.70

Taxable equivalent yield = 6.57%

Therefore, the taxable equivalent yield on a tax-exempt municipal bond with a 4.60% yield for someone in the 30 percent tax bracket is 6.57%.