Question

Sandra is in the 28% tax bracket and purchased a corporate bond at par with a 12% coupon rate. What is the equivalent yield for a municipal bond?

Answer 1

Equivalent Yield=8.64%

Step-by-step explanation:

The Sandra will be getting 28% of tax benefit on its interest cost.

The equivalent yield for a municipal bond can be calculated by the Sandra Using the following formula:

Equivalent Yield=Coupon Rate(1-tax rate)

Coupon rate=12%

tax rate=28%

Equivalent Yield=12%(1-28%)

=12%(72%)

=8.64%