Question

A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 5.40 percent yield to maturity and a similar-risk corporate bond that offers a 6.90 percent yield. Determine the equivalent taxable yield. (Round your answer to 2 decimal places.)

Answer 1

Answer: 8.059%

Step-by-step explanation:

From the question, we are informed that a client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 5.40 percent yield to maturity and a similar-risk corporate bond that offers a 6.90 percent yield.

Equivalent taxable yield will be calculated as:

= Municipal bond yield/(1 - Tax Rate)

= 5.40/(1 - 33%)

= 5.40/(1 - 0.33)

= 5.40/0.67

= 8.059%