Question

Consider an investor facing a 38% marginal tax rate who purchases a tax-exempt issue with a yield of 4.25%. What is equivalent taxable yield of his investment?A. 11.18% B. 4.25% C. 1.62% D. 6.85% E. 2.64%

Answer 1

Answer:

Option D

Explanation:

We can calculate the  equivalent taxable yield of investor facing a 38% marginal tax rate investment as follows

DATA

Tax rate = 38%

After tax yield = 4.25%

Solution

Let's suppose the equivalent taxable yield is x then

x(1-0.38)=4.25

x(0.62)= 4.25

x = 6.85%

Option D would be the correct answer