Final answer:
The taxable equivalent yield on a municipal bond with a yield to maturity of 6.50 percent and a 25 percent marginal tax rate is 8.67%.
Step-by-step explanation:
The taxable equivalent yield on a municipal bond can be calculated by dividing the tax-free yield by one minus the marginal tax rate. In this case, the yield to maturity of the municipal bond is 6.50 percent and the marginal tax rate is 25 percent. So, the taxable equivalent yield can be calculated as follows:
(0.065)/(1-0.25) = 0.0867 or 8.67%
This means that a taxable bond would need to have a yield of 8.67% in order to provide the same after-tax return as the municipal bond with a yield of 6.50%.