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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