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27 May, 18:01

Suppose that short-term municipal bonds currently offer yields of 4%, while comparable taxable bonds pay 5%. Whichgives you the higher after-tax yield if your tax bracket is:a. Zerob. 10%c 20%d. 30%

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  1. 27 May, 21:10
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    a. 5.00%

    b. 4.50%

    c. 4.00%

    d. 3.50%

    Explanation:

    The after tax yield is determined by the formula given below;

    Equivalent Taxable Yield = r * (1 - t)

    a. when t = 0 then 5% * (1 - 0)

    = 5.00%

    When t=0, the after tax yield for taxable bond is same as before tax yield and is greater than municipal bond.

    b. when t = 10% then 5% * (1 - 10%)

    = 4.50%

    c. when t = 20% then 5% * (1 - 20%)

    = 4.00%

    d. when t = 30% then 5% * (1 - 30%)

    = 3.50%
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