Question

g You are evaluating a Municipal bond with a yield to maturity of 4.65%. You are in the 35% tax bracket. What is the taxable bond equivalent yield for the bond

Answer 1

7.15%

Step-by-step explanation:

since you do not have to pay any federal taxes on the interests that you earn from municipal bonds, their interest rate is considered an after tax interest rate. In order to find the equivalent corporate bond or federal security that yields the same return we can use the following formula:

after tax yield = pre-tax yield x (1 - tax rate)

4.65% = pre-tax yield x (1 - 35%)

pre-tax yield = 4.65% / 0.65 = 7.15%