A bond issued by the State of Pennsylvania provides a 9 percent yield. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 36 percent tax bracket?

Question

Quizplus · Accepted Answer

The after-tax yield on the Synthetic Chemical Company bond must equal the tax-free yield of the Pennsylvania bond. The formula is: Tax-free yield = Taxable yield * (1 - Tax rate). Solving for the taxable yield: 9% = Taxable yield * (1 - 0.36), Taxable yield = 9% / 0.64 = 14.06%.

A Bond Issued by the State of Pennsylvania Provides a 9