SOLUTION: Please help: If you compare the yield of a municipal bond with that of a treasury bond, what is the equivalent before-tax yield of a municipal bond yielding 6% per year for an inv

Question 181198This question is from textbook Foundations of Finance
: Please help:
If you compare the yield of a municipal bond with that of a treasury bond, what is the equivalent before-tax yield of a municipal bond yielding 6% per year for an investor in the 25% tax bracket?
I got 4.0%
Please help and thank you in advance. This question is from textbook Foundations of Finance

Answer by Mathtut(3670) (Show Source): You can put this solution on YOUR website!
well municipal bonds are usually tax free. On that assumption you take the interest rate of 6% and divide by (1 minus the % tax bracket your in), which in this case is 25%. We are looking for the PRE TAX yield which will be higher, not lower. The whole idea of this is to compare it to an investement that is taxed, like a treasurey bond, so that you can compare yields.
:
1-.25=.75.
:
6% /(.75)= 8% so the true yield of this, if tax free, is 8%
RELATED QUESTIONS
suppose you buy a 5 year treasury bond face value 2,000 for a purchase of 1800. Assuming... (answered by jorel1380)

Cassandra bought a 10−yr Treasury note that paid the equivalent of 3.5% simple... (answered by VFBundy)

good afternoon, please help me solve this problem: Kelly Fisher has a total of $26,000 (answered by scott8148)

Hi! Can you please help out with this problem? I can come up with the z scores... like... (answered by stanbon)

Ok I have a problem that I believe I solved but I just want to be sure I am completing it (answered by stanbon)

Union Local School District has a bond outstanding with a coupon rate of 3.7% paid... (answered by jim_thompson5910)

Hi, please help me solve this problem 1.If the coupon rate of USD 1000 is 6%, the... (answered by ElectricPavlov)

A 10-year bond has a face value of $1,000. The bond has a 7 percent semiannual coupon.... (answered by solver91311)

A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and... (answered by ikleyn)