Question

Assume you are in the 20 percent tax bracket and purchase a 7.6 percent municipal bond. Calculate the taxable equivalent yield for this investment.

Answer #1

**Calculation of
Taxable Equivalent yield of Municipal Bond:**

The following Show how to calculate the tax equivalent yield in few steps.

- Find the reciprocal of your tax rate. or in other words, use (1 - Your tax rate). If you pay 20%, your reciprocal would be (1 - 0.20) = 0.80, or 80 percent.
- Divide this into the yield on the tax - free bond to find out the tax equivalent yield.
- If the bond in question yields 7.6 percent, use the equation.

= 7.6 / 0.80

= 9.5 % yield

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