Kayla is in the 28% federal income tax bracket and the 5% state income tax bracket. If Jennifer purchases a municipal bond yielding 4.25%, what is the equivalent yield on a taxable bond if the municipal bond income is exempt from both federal and state taxes?

Question

Quizplus · Accepted Answer

First, calculate the after-tax yield on the municipal bond:

After-tax yield = 4.25% x (1 - 0.28 - 0.05) = 2.62%

Next, use the formula for equivalent taxable yield:

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

Equivalent taxable yield = 4.25% / (1 - 0.28 - 0.05) = 5.62%

Therefore, the answer is C, 5.62% is the equivalent yield on a taxable bond.

Kayla Is in the 28% Federal Income Tax Bracket and the 5