A tax-exempt municipal bond is currently earning 5.4 percent interest while a similar taxable bond is earning 7.5 percent interest.Taxpayers in the ____ percent marginal tax bracket and above would benefit by investing in the tax-exempt bond.

Question

Quizplus · Accepted Answer

To determine which bond is more beneficial, you can calculate the tax-equivalent yield of the tax-exempt bond. The formula is Tax-Exempt Yield / (1 - Marginal Tax Rate). For the tax-exempt bond earning 5.4%, the calculation for a taxpayer in the 33% tax bracket would be 5.4% / (1 - 0.33) = 8.06%. Since 8.06% is greater than the 7.5% yield of the taxable bond, taxpayers in the 33% marginal tax bracket and above would benefit more from the tax-exempt bond.

A Tax-Exempt Municipal Bond Is Currently Earning 5