Final answer:
The taxable equivalent yield of a 4% tax-exempt municipal bond for someone in the 35% tax bracket is 6.15%, which is calculated by dividing the tax-exempt yield (4%) by (1 minus the tax rate (0.35)).
Step-by-step explanation:
The question revolves around the concept of calculating the taxable equivalent yield for a tax-exempt municipal bond for an individual in a specific tax bracket. To find the taxable equivalent yield of a 4% tax-exempt bond for someone in the 35% tax bracket, you need to adjust the tax-exempt yield to make it comparable to a taxable bond.
The formula to calculate the taxable equivalent yield is Tax-Exempt Yield divided by (1 - Tax Rate).
In this instance, the taxable equivalent yield would be:
4% / (1 - 0.35) = 4% / 0.65 = 6.15%
This means that a tax-exempt municipal bond yielding 4% is equivalent to a taxable bond yielding 6.15% for someone in the 35% tax bracket.