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%
|
|
|
