Question

A tax-exempt municipal bond with a coupon rate of 4.00% has a market price of 98.77% of par. The bond matures in 17.00 years and pays semi-annually. Assume an investor has a 16.00% marginal tax rate. The investor would prefer otherwise identical taxable bond if it's yield to maturity was more than _____%

Answer 1

As per the details given in the information-
Enter the stroke in the financial Calculator-
FV = 100
PV = -98.77
PMT = 2 (100*4% = 4/2 =2, coupon is made semiannually)
N = 34 (17*2 = 34)
CPT -I/Y = 2.051
YTM = 2.051*2 =.4.102%.

4.102 is the 84% of the bond, if the bond is non taxable.
If the bond is taxable minimum YTM is 4.102 / 0.84 = 4.88

The investor would prefer identical taxable bond if YTM is greater than 4.88%

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