The yield on a tax-exempt municipal bond earning 5.0 percent is equivalent to ____ percent on a taxable corporate bond for a taxpayer in the 35 percent marginal tax bracket.

Question

Quizplus · Accepted Answer

To calculate the tax-equivalent yield for a municipal bond, we can use the following formula:

Tax-Equivalent Yield = Municipal Bond Yield / (1 - Marginal Tax Rate)

In this case, the municipal bond yield is 5.0 percent, and the marginal tax rate is 35 percent. Therefore:

Tax-Equivalent Yield = 5.0% / (1 - 0.35) = 7.69%

Rounding to the nearest tenth gives us 7.7 percent, which is the answer choice D.

The Yield on a Tax-Exempt Municipal Bond Earning 5