Question

A 5.5%, 20-year municipal bond is currently priced to yield 7.2%. For a taxpayer in the 33% marginal tax bracket, this bond would offer an equivalent taxable yield of:_____.
A) 8.2000.
B) 10.75%.
C) 11.40%.
D) 4.82%.

Answer 1

Answer:

B) 10.75%.

Explanation:

Marginal tax bracket = 33%

The 20 year old bond is being priced to yield 7.2%

We are required to find the equivalent taxable yield that this bond is going to offer.

Equivalent taxable yield =

Yield/(1-tax%)

= 7.2%/(1-33%)

= 10.75%

this bond would offer an equivalent taxable yield of 10.75%