Consider a tax-exempt municipal bond yielding 4%. To an investor in the 33% marginal tax bracket, what is the equivalent before-tax interest rate that a taxable bond would have to offer to be considered equivalent to the municipal bond?

Question

Consider a tax-exempt municipal bond yielding 4%.  To an investor in the 33% marginal tax bracket, what is the equivalent before-tax interest rate that a taxable bond would have to offer to be considered equivalent to the municipal bond?

Quizplus · Accepted Answer

The equivalent before-tax interest rate for a taxable bond can be calculated using the formula: Tax-Exempt Yield / (1 - Tax Rate). For a tax-exempt municipal bond yielding 4% to an investor in the 33% marginal tax bracket, the calculation is 4% / (1 - 0.33) = 4% / 0.67 = 5.97%.

Consider a Tax-Exempt Municipal Bond Yielding 4