You are considering the purchase of a municipal bond as an i

You are considering the purchase of a municipal bond as an investment. The bond pays a yield of 5.75 percent. Calculate the tax equivalent yield if your marginal tax rate is 28 percent. Calculate the tax equivalent yield if your marginal tax rate is 21 percent. Calculate the tax equivalent yield if your marginal tax rate is 15 percent.

Solution

tax equivalent yield=Yield on municipal bond/(1-tax rate).

a. tax equivalent yield=5.75/(1-0.28)

=7.99%(Approx).

b. tax equivalent yield=5.75/(1-0.21)

=7.28%(Approx).

c. tax equivalent yield=5.75/(1-0.15)

=6.76%(Approx).