A 9 percent coupon bond issued by the State of Pennsylvania sells for R1,000 and thus provides a 9 percent yield to maturity.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 28 percent tax bracket?

Question

Quizplus · Accepted Answer

The State of Pennsylvania bond is tax-exempt, so its after-tax yield is 9%. For the Synthetic Chemical Company bond, which is taxable, the after-tax yield must also be 9%. The formula for after-tax yield is: Yield * (1 - Tax Rate). Solving for the yield: 9% = Yield * (1 - 0.28), Yield = 9% / 0.72 = 12.50%.

A 9 Percent Coupon Bond Issued by the State of Pennsylvania