Question

A taxable bond with a coupon rate of 8.00% has a market price of 98.05% of par. The bond matures in 20.00 years ans pays semi-annually. Assume an investor has a 39.00% marginal tax rate. The investor would prefer otherwise identical tax-exempt bond if it's yield to maturity was more than _____%

Answer 1

Answer - 19.83%

Calculation (Using Financial Calculator) :-

N = 20

FV = $100 (Assumed as not given in question)

PMT = $16 ($100 FV x 8% x 2)

PV = (-) $98.05

I/Y(Solve) = 16.256%

Annual Yield = 32.51%

Post Tax Annual Yield = Annual Yield (1 - Tax rate)

Post Tax Annual Yield = 32.51 (1 - 0.39)

Post Tax Annual Yield = 19.83%

Since Post Tax Annual Yield is 19.83%, Hence an investor would prefer  identical tax-exempt bond if it's yield to maturity was more than 19.83%.