Asked by Akeim Potter on May 05, 2024
Verified
For a taxpayer in the 24% marginal tax bracket, a 20-year municipal bond currently yielding 5.5% would offer an equivalent taxable yield of
A) 7.24%.
B) 10.75%.
C) 5.5%.
D) 4.125%.
Municipal Bond
A debt security issued by municipalities to finance public projects, often tax-exempt for investors.
Marginal Tax Bracket
The tax rate that applies to the last dollar of the taxpayer's income, indicating the percentage of tax applied to their highest level of income.
- Compute the post-tax yield for both municipal and corporate bonds within designated tax brackets.
Verified Answer
VB
Vinny BaroneMay 12, 2024
Final Answer :
A
Explanation :
The equivalent taxable yield is calculated by dividing the tax-exempt yield by (1 - marginal tax rate). For a 5.5% yield and a 24% tax bracket, the calculation is 5.5% / (1 - 0.24) = 7.24%.
Learning Objectives
- Compute the post-tax yield for both municipal and corporate bonds within designated tax brackets.