Question

Suppose that short-term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Whichgives you the higher after-tax yield if your tax bracket is:a. Zerob. 10%c 20%d. 30%

Answer 1

Answer:

a. 5.00%

b. 4.50%

c. 4.00%

d. 3.50%

Explanation:

The after tax yield is determined by the formula given below;

Equivalent Taxable Yield = r * (1 - t)

a. when t = 0 then 5% * (1 - 0)

= 5.00%

When t=0, the after tax yield for taxable bond is same as before tax yield and is greater than municipal bond.

b. when t = 10% then 5% * (1 - 10%)

= 4.50%

c. when t = 20% then 5% * (1 - 20%)

= 4.00%

d. when t = 30% then 5% * (1 - 30%)

= 3.50%