A municipal bond selling for $1,000 pays the holder $80 per year. If the bondholder pays a 25 percent income tax rate, the after-tax yield is

Question

Quizplus · Accepted Answer

The after-tax yield is the yield after taxes have been paid. In this case, the bondholder pays a 25 percent income tax rate, so the after-tax yield is 80% of the before-tax yield. The before-tax yield is $80/$1,000 = 8%. Therefore, the after-tax yield is 80% of 8%, which is 6.4%.

A Municipal Bond Selling for $1,000 Pays the Holder $80