Question

A municipal bond carries a coupon rate of 5.45% and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a 30% combined tax bracket?

Answer 1

Answer:

7.78%

Explanation:

Equivalent taxable yield can be calculated as follows

Equivalent taxable yield = Coupon rate / 1 - Tax Rate

Equivalent taxable yield= 5.45%/ 1 - 30% x 100

Equivalent taxable yield = 7.78%