Question

An investor recently purchased a corporate bond that yields 9%. The investor is in the 36% combined federal and state tax bracket. What is the bond’s after-tax yield?

Answer 1

Answer: 5.76%

Step-by-step explanation:

Given the following ;

Bond yield = 9%

Tax rate = 36%

After a businesses must have accounted for taxes or deducted all necessary taxes from their income, profit or specific business yield, the rate of return of the investment after this deductions is called the after tax yield. It is calculated using the formula ;

After tax yield = Pretax yield × (1 - tax rate)

After tax yield = 0.09 × (1 - 0.36)

After-tax yield = 0.09 × 0.64

After-tax yield = 0.0576

After-tax yield = 5.76%

This is the rate of return on the corporate bond after deducting the federal and state tax rate.

The bond yield of 9% is the rate of return on the investment prior to the deduction of taxes (Pretax)

Answer 2

The bonds after tax yield is given as Pre tax yield X (1-tax rate)

After Tax Yield = 9% X (1-0.36) = 9%X0.64=5.76%

Answer: 5.76%

Step-by-step explanation:

The after-tax yield of any financial instrument such as a bond or even stock dividends is the effective yield after the applicable taxes have been paid. Higher the tax rate, lesser is the after-tax yield for the investor.

To calculate your after-tax yield, you need to know both the rate of return on your investment and the tax rate that applies to those profits. First, convert your tax rate that applies to the earnings to a decimal by dividing by 100. Second, subtract the result from 1 to calculate the portion of your earnings that you get to keep after you pay taxes on them. Third, multiply the result by the rate of return on the investment to calculate your after-tax yield.

For example, say that you want to calculate the after-tax rate of return on your certificate of deposit. If your rate of return is 3 percent and the tax rate applied to that interest is 24 percent, start by dividing 24 percent by 100 to get 0.24. Second, subtract 0.24 from 1 to get 0.76 – the portion that you get to keep after accounting for taxes. Finally, multiply 0.76 by your overall rate of return of 3 percent to find your after-tax yield is 2.28 percent.