Question

Each tile provides an investor’s tax bracket along with the tax-free yield of a bond the investor purchased. Use the formula to determine the taxable equivalent yields of the investments, and then order the investments from least to greatest return.

Taxable Equivalent Yield = (1 - Tax Bracket) * Tax-Free Yield

Investments:

Tax Bracket: 18%, Tax-Free Yield: 3%
Tax Bracket: 24%, Tax-Free Yield: 6%
Tax Bracket: 32%, Tax-Free Yield: 3%
Tax Bracket: 22%, Tax-Free Yield: 5%
Tax Bracket: 32%, Tax-Free Yield: 4%
a) 2, 5, 4, 1, 3
b) 3, 1, 5, 2, 4
c) 1, 4, 3, 5, 2
d) 4, 2, 1, 3, 5

Answer 1

To determine the taxable equivalent yields of the investments and order them from least to greatest return, we can use the formula (1 - Tax Bracket) * Tax-Free Yield. Applying this formula, the ordered investments from least to greatest return are 3, 1, 5, 2, 4.

Step-by-step explanation:

To determine the taxable equivalent yields of the investments and order them from least to greatest return, we can use the formula:

Taxable Equivalent Yield = (1 - Tax Bracket) * Tax-Free Yield

Applying this formula to the given investments:

1. Tax Bracket: 18%, Tax-Free Yield: 3%
   Taxable Equivalent Yield = (1 - 0.18) * 0.03 = 0.0246
2. Tax Bracket: 24%, Tax-Free Yield: 6%
   Taxable Equivalent Yield = (1 - 0.24) * 0.06 = 0.0456
3. Tax Bracket: 32%, Tax-Free Yield: 3%
   Taxable Equivalent Yield = (1 - 0.32) * 0.03 = 0.0204
4. Tax Bracket: 22%, Tax-Free Yield: 5%
   Taxable Equivalent Yield = (1 - 0.22) * 0.05 = 0.039
5. Tax Bracket: 32%, Tax-Free Yield: 4%
   Taxable Equivalent Yield = (1 - 0.32) * 0.04 = 0.0272

Ordering the investments from least to greatest return:

1. Investment 3: Taxable Equivalent Yield of 0.0204
2. Investment 1: Taxable Equivalent Yield of 0.0246
3. Investment 5: Taxable Equivalent Yield of 0.0272
4. Investment 2: Taxable Equivalent Yield of 0.039
5. Investment 4: Taxable Equivalent Yield of 0.0456