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.

1. 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.
2. Divide this into the yield on the tax - free bond to find out the tax equivalent yield.
3. If the bond in question yields 7.6 percent, use the equation.

= 7.6 / 0.80

= 9.5 % yield