Question

What is the tax equivalent yield for a City of Mesa 2.5% muni bond for an investor in the 35% tax bracket?

Answer 1

Tax equivalent yield = 38.5%

Step-by-step explanation:

Return on a municipal bond = 2.5%

Since municipal bonds are non taxable, for a similar taxable bond, tax equivalent yield is :

Tax equivalent yield = Yield on municipal bond / (1 - tax rate)

Tax equivalent yield = 2.5% / ( 1 - 0.35)

Tax equivalent yield = 0.025 / 0.65

Tax equivalent yield = 0.03846154

Tax equivalent yield = 38.5%