Question

Show correct answersItem 1Item 1 2.85 of 2.85 points awarded Item Scored A bank is considering two securities: a 30-year Treasury bond yielding 4 percent and a 30-year municipal bond yielding 3 percent. a. If the bank’s tax rate is 35 percent, calculate the Treasury bond's tax equivalent yield. (Round your answer to 1 decimal place. (e.g., 32.1)) b. Which bond offers the higher tax equivalent yield?

Answer 1

A. 2.6%

B.it can be said that 30 -year municipal bond offers the highest after tax yield.

Step-by-step explanation:

a. The after tax yield of 30-year treasury bond = before tax yield *(1 - tax rate)

here before tax yield = 4%.

tax rate = 35% =>0.35

=> 4% *( 1 -0.35)

=> 4% *(0.65)

=>2.6%.

b. the after tax yield of 30 -year treaury bond is 2.6%.

The after tax yield on 30- year municipal bond will be 3%

it can be said that 30 -year municipal bond offers the highest after tax yield.