Question

Assume you are in the 28 percent tax bracket and purchase a municipal bond with a yield of 3.10 percent. Use the formula presented in chapter 11 of your textbook to calculate the taxable equivalent yield for this investment. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Required:
Three years ago you purchased a corporate bond that 5.8 percent. The purchase price was $1000. What is the annual dollar amount of interest that you receive from your bond investment?

Answer 1

a. Taxable equivalent yield:

Municipal bonds are tax free so if they are to be compared with bonds where you have to pay taxes, the following formula is used:

= Municipal interest / ( 1 - tax rate)

= 3.10 / (1 - 28%)

= 4.31%

b. Annual amount of interest received:

= Coupon rate * Face value

= 5.8% * 1,000

= $58