What is the tax-equivalent yield of a double tax-free 4% municipal bond if the investor is in the 33% federal and 6% state tax brackets?
A)6.35%
B)5.97%
C)6.56%
D)4.26%

Question

Quizplus · Accepted Answer

The tax-equivalent yield is the yield an investor would need to earn on a taxable bond to receive the same after-tax return as the double tax-free bond. To calculate the tax-equivalent yield, we need to divide the municipal bond yield by the factor (1 - federal tax rate - state tax rate). In this case, the tax-equivalent yield is 4% / (1 - 0.33 - 0.06) = 6.35%.

What Is the Tax-Equivalent Yield of a Double Tax-Free 4