If a bank earns 5% on a tax-free municipal security, and the bank is in the 35% federal income tax bracket, the tax equivalent yield on the security is:
A) 14.3%
B) 7.7%
C) 17.5%
D) none of the above.

Question

Quizplus · Accepted Answer

The tax equivalent yield is calculated as the tax-free yield divided by (1 - tax rate). So, for a 5% tax-free yield and a 35% tax rate, the tax equivalent yield is 5% / (1 - 0.35) = 7.69%, which rounds to 7.7%.

If a Bank Earns 5% on a Tax-Free Municipal Security