Yields of a Bond A 4.5 percent coupon municipal bond has 10 years left to maturity and has a price quote of 97.75. The bond can be called in 4 years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 33 percent marginal tax bracket? (Assume interest payments are paid semi-annually and a par value of $5,000.)

Question

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First, we need to calculate the bond's yield to maturity (YTM).

Price = (Coupon Payment / (1 + YTM/2)^20) + (Coupon Payment / (1 + YTM/2)^19) + ... + (Coupon Payment + Par Value) / (1 + YTM/2)^1

97.75 = (2.25 / (1 + YTM/2)^20) + (2.25 / (1 + YTM/2)^19) + ... + (2.25 + 5000) / (1 + YTM/2)^1

Using a financial calculator or excel, the YTM is calculated to be 4.78%.

Next, we need to calculate the taxable equivalent yield (TEY) for an investor in the 33% marginal tax bracket.

TEY = YTM / (1 - Marginal Tax Rate)

TEY = 4.78% / (1 - 0.33)

TEY = 7.13%

Therefore, the answer is (C) 7.13%.

Yields of a Bond a 4