document.write( "<A HREF=/cgi-bin/jump-to-question.mpl?question=181198>Question 181198</A>This question is from textbook <A HREF=http://www.amazon.com/exec/obidos/ASIN/0536860521/algebrahomeworkh>Foundations of Finance</A><BR>\n" );
document.write( ": <I><SPAN STYLE=\"word-break: break-all;\"> Please help:<BR>\n" );
document.write( "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?\r<BR>\n" );
document.write( "\n" );
document.write( "I got 4.0%\r<BR>\n" );
document.write( "\n" );
document.write( "Please help and thank you in advance. </SPAN>\n" );
document.write( "</I><HR><TABLE width=100%><TR><TD><B><A HREF=http://www.algebra.com/>Algebra.Com's</A> Answer #135844 by </B><A HREF=/tutors/aboutme.mpl?userid=Mathtut><B>Mathtut(3670)</B></A><img src=\"/images/stars/stars-13.gif\" alt=\"\" >&nbsp;<A HREF=/tutors/aboutme.mpl?userid=Mathtut><IMG SRC=http://www.algebra.com/images/aboutme-small.gif BORDER=0 alt=\"About Me\" VALIGN=MIDDLE></A>&nbsp;<IMG SRC=http://www.algebra.com/images/nopicture.jpg><BR>You can <A HREF=\"/cgi-bin/embed-solution.mpl?show=1&solution=135844\">put this solution on YOUR website!</A><BR><SPAN STYLE=\"word-break: break-all;\"> 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.<BR>\n" );
document.write( ":<BR>\n" );
document.write( "1-.25=.75.<BR>\n" );
document.write( ":<BR>\n" );
document.write( "6% /(.75)= 8% so the true yield of this, if tax free, is 8% </SPAN>\n" );
document.write( "</TD></TR></TABLE>\n" );