Taxable Equivalent Yield What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4.5 percent for an investor in the 39 percent marginal tax bracket?
A)1.76 percent
B)4.50 percent
C)7.38 percent
D)11.54 percent

Question

Quizplus · Accepted Answer

To find the taxable equivalent yield, we need to first calculate the tax-exempt yield. Since this is a municipal bond, it is already tax-exempt at the federal level. Therefore, the tax-exempt yield is 4.5 percent. 
Next, we need to calculate the additional yield an investor would need to receive from a taxable bond to match the tax-exempt yield. 
Taxable Equivalent Yield = Tax-Exempt Yield / (1 - Marginal Tax Rate) 
Taxable Equivalent Yield = 4.5% / (1 - 0.39) = 7.38% 
Therefore, the taxable equivalent yield on this municipal bond for an investor in the 39 percent marginal tax bracket is 7.38 percent.

Taxable Equivalent Yield What Is the Taxable Equivalent Yield on a Municipal