Question

Mr.X is an investor who has invested in bonds. After investing he is receiving negative and contradictory views regarding his investment in bonds. To solve his doubt and remove his confusion, he decided to compute themunicipal bond’s equivalent taxable yield. He hasinformation that issue was made with 8.2% coupon with a par value of $1,010. Assuming that the amount of tax payable is $10,000, earnings after tax of $31,000.00, and earnings before tax are $41,000, determine the equivalent taxable yield of thebond.

a. The equivalent taxable yield (ETY) of the bond is 32.26%.
b. The equivalent taxable yield (ETY) of the bond is 10.85%
c. The equivalent taxable yield (ETY) of the bond is 24.39%.
d. The equivalent taxable yield (ETY) of the bond is 9.22%.

Answer 1

The equivalent taxable yield (ETY) of the municipal bond, given the tax rate and the bond's coupon rate, is calculated to be approximately 10.85%.

Step-by-step explanation:

The equivalent taxable yield (ETY) of the municipal bond can be calculated using the following information provided: the municipal bond has an 8.2% coupon rate, a tax payable of $10,000, earnings after tax of $31,000, and earnings before tax of $41,000. To determine the ETY, we first need to find the tax rate, which would be the tax payable divided by the earnings before tax. So, the tax rate is $10,000 / $41,000 = 0.2439 or 24.39%. Now, we can use the formula ETY = Municipal Bond Interest Rate / (1 - Tax Rate) to find the equivalent taxable yield. Thus, ETY = 8.2% / (1 - 0.2439) which equals approximately 10.85%.