Question

            To a taxpayer in the 34% tax bracket, a municipal bond available at a price of 100 and a coupon rate of 12% has a taxable equivalent yield of __________.

A.        6.6%

B.        10.0%

C.        13.4%

D.        18.2%

Answer 1

D. 18.2%

Taxable equivalent yield = Municipal bond yield / (1 - Tax rate)

Taxable equivalent yield = 0.12 / (1 - 0.34)

Taxable equivalent yield = 0.182 or 18.2%