Assume you are in the 25 percent tax bracket and purchase a 5.80 percent, tax-exempt municipal bond. Calculate the tax-equivalent yield for this investment.

Question

anonymous · Answer

hold up...lemme do the math :)

anonymous · Answer

Im not so sure I did it right lol but I got 0.308 :) hope I helped

jim_thompson5910 · Answer

According to this page http://www.investopedia.com/terms/t/taxequivalentyield.asp the formula is Tax Equivalent Yield = (Tax Free Bond Yield)/(1 - Tax Rate) so... Tax Equivalent Yield = (Tax Free Bond Yield)/(1 - Tax Rate) Tax Equivalent Yield = (0.058)/(1 - 0.25) Tax Equivalent Yield = 0.07733333333333 So the Tax Equivalent Yield is 7.7333% roughly. This means that if you bought a bond where you have to pay taxes on it, then you should go for one that yields 7.7333% to get the same yield for the given bond at the top of the problem.