Julie Johnson is in the 31 percent tax bracket.If she were to purchase a $1,000 municipal bond that had a stated interest rate of 6.5%,the taxable equivalent yield would be

Question

Quizplus · Accepted Answer

To calculate the taxable equivalent yield (TEY), we need to find the yield that a taxable investment should offer to generate the same after-tax return as the tax-free municipal bond.

TEY = Municipal bond yield/ (1 - Marginal tax rate)

Here, Municipal bond yield = 6.5% and Marginal tax rate = 31%

TEY = 6.5% / (1 - 0.31) = 9.42%

Therefore, the taxable equivalent yield for the municipal bond is 9.42%. The best choice is D.

Julie Johnson Is in the 31 Percent Tax Bracket