A municipal bond you are considering as an investment currently pays a yield of 6.82 percent....

Question

Question

A municipal bond you are considering as an investment currently pays a yield of 6.82 percent.

a. Calculate the tax equivalent yield if your marginal tax rate is 28 percent.

b. Calculate the tax equivalent yield if your marginal tax rate is 21 percent.

business finance

Answer 1

Answer #1

Municipal bonds are tax free.

They pay 6.82%

A) If marginal tax rate is 28%, then (1- tax rate%)* tax equivalent yield = municipal yield%

(1-28%)*tax equivalent yield=6.82%

tax equivalent yield = 9.47%

B) If marginal tax rate is 21%, then (1- tax rate%)* tax equivalent yield = municipal yield%

(1-21%)*tax equivalent yield=6.82%

tax equivalent yield = 8.63%

Answer 2

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