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
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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
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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
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.
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6% /(.75)= 8% so the true yield of this, if tax free, is 8%
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