Question

A municipal bond has a coupon rate of 6.13 percent and a YTM of 5.73 percent. If an investor has a marginal tax rate of 35 percent, what is the equivalent pre-tax yield on a taxable bond?

Answer 1

The equivalent pre-tax yield on a taxable bond is 8.82 percent.

Step-by-step explanation:

To find the equivalent pre-tax yield on a taxable bond, we need to consider the tax advantage offered by municipal bonds. Municipal bonds are exempt from federal income tax, so the pre-tax yield can be calculated by simply dividing the taxable yield by (1 - tax rate). In this case, the taxable yield is equal to the yield to maturity (YTM) of 5.73 percent. So the equivalent pre-tax yield would be 5.73 percent divided by (1 - 0.35) which equals 8.82 percent.