An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond.She looks up municipal bond yields (r_m)but wishes to calculate the taxable equivalent yield r.The formula she should use is given by ______. A) r = r_m * (1 - 28%) B) r = r_m/(1 - 72%) C) r = r_m * (1 - 72%) D) r = r_m/(1 - 28%)

Question

Quizplus · Accepted Answer

Since the investor is in the 28% tax bracket, the taxable equivalent yield can be calculated by dividing the municipal bond yield by (1 - 0.28), which represents the percentage of income that will be taxed. Therefore, the correct formula is r = r_m/(1 - 28%). Option D is the only one that represents the correct formula.

An Investor in a 28% Tax Bracket Is Trying to Decide