Question

What's the taxable equivalent yield on a municipal bond with a yield to maturity of 3.9 percent for an investor in the 35 percent marginal tax bracket

Answer 1

When a person has a marginal tax bracket of 35%, their taxable equivalent yield to a municipal bond is 6%.

What is the taxable equivalent yield?

It can be found by the formula:

= Municipal bond / ( 1 + tax rate)

Solving gives:

= 3.9% / ( 1 - 35%)

= 3.9% / 0.65

= 6%

In conclusion, a 6% return would be an appropriate taxable equivalent yield.

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