If a bank earns 4% on a tax-free municipal security, and is in the 35% federal tax bracket, the tax equivalent yield on that security is 11.4%.

Name: If a bank earns 4% on a tax-free municipal security, and is in the 35% federal tax bracket, the tax equivalent yield on that security is 11.4%.
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Quizplus · Accepted Answer

The tax equivalent yield is calculated as the tax-free yield divided by (1 - tax rate). So, for a 4% tax-free yield and a 35% tax rate, the tax equivalent yield is 4% / (1 - 0.35) = 4% / 0.65 = 6.15%.

If a Bank Earns 4% on a Tax-Free Municipal Security