Question

Assume you are in the 32 % tax bracket and purchase a 3.34%, tax- exempt municipal bond. Calculate the taxable equivalent yield for this investment using the formula:

Taxable equivalent yield = Tax-exempt return / (1.0 - Your tax rate)

Answer 1

To calculate the taxable equivalent yield of a tax-exempt municipal bond, use the formula: Taxable equivalent yield = Tax-exempt return / (1.0 - Your tax rate). Plug in the values for your tax rate and the bond's tax-exempt return and simplify the equation to find the yield.

Step-by-step explanation:

To calculate the taxable equivalent yield for the tax-exempt municipal bond, you need to use the formula:

Taxable equivalent yield = Tax-exempt return / (1.0 - Your tax rate)

Assuming you are in the 32% tax bracket and the bond has a tax-exempt return of 3.34%, you can plug in the values:

Taxable equivalent yield = 3.34% / (1.0 - 0.32)

Simplifying this equation gives: Taxable equivalent yield = 3.34% / 0.68

Calculating this gives the taxable equivalent yield of approximately 4.91%