Question

Find the equivalent taxable yield of a short-term municipal bond currently offering yields of 5% for tax brackets of (a) zero, (b) 10%, (c) 20%, and (d) 30%. (Round your answers to 2 deci

	Equivalent taxable yield
a. zero		%
b. 10%		%
c. 20%		%
d. 30%		%

mal places.)

Answer 1

a. The equivalent taxable yield is computed as shown below:

= Yield on municipal bond / (1 - tax rate)

= 0.05 / (1 - 0)

= 5%

b. The equivalent taxable yield is computed as shown below:

= Yield on municipal bond / (1 - tax rate)

= 0.05 / (1 - 0.10)

= 5.56% Approximately

c. The equivalent taxable yield is computed as shown below:

= Yield on municipal bond / (1 - tax rate)

= 0.05 / (1 - 0.20)

= 6.25%

d. The equivalent taxable yield is computed as shown below:

= Yield on municipal bond / (1 - tax rate)

= 0.05 / (1 - 0.30)

= 7.14% Approximately

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