A U.S. government bond carries a before-tax yield to maturity of 15 percent. It is purchased by a commercial bank, which plans to hold the bond until it matures. The bank's marginal tax rate (i.e., tax bracket) is 30 percent. What is the bond's after-tax yield to the bank (to the nearest tenth of a percent)?

Question

Quizplus · Accepted Answer

The after-tax yield can be calculated by taking the before-tax yield and subtracting the taxes paid on it. The taxes paid are the before-tax yield times the tax rate. So, for a 15% before-tax yield and a 30% tax rate, the calculation is 15% * (1 - 0.30) = 10.5%.

A US Government Bond Carries a Before-Tax Yield to Maturity of of 15