1. A municipal bond has a coupon rate of 5.83 percent and a YTM of 5.53 percent. If an investor has a marginal tax rate of 28 percent, what is the equivalent pretax yield on a taxable bond? IF RELEVANT SHOW CALCULATOR STEPS
1. A municipal bond has a coupon rate of 5.83 percent and a YTM of 5.53 percent. If an investor has a marginal tax rate of 28 percent, what is the equivalent pretax yield on a taxable bond? IF RELEVANT SHOW CALCULATOR STEPS
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![**Problem: Evaluating Equivalent Pretax Yield on Taxable Bonds**
A municipal bond has a coupon rate of 5.83 percent and a Yield to Maturity (YTM) of 5.53 percent. If an investor has a marginal tax rate of 28 percent, what is the equivalent pretax yield on a taxable bond? If relevant, show calculator steps.
**Solution:**
To find the equivalent pretax yield on a taxable bond when given the YTM of a municipal bond, we use the formula:
\[
\text{Equivalent Pretax Yield} = \frac{\text{Municipal Bond YTM}}{1 - \text{Tax Rate}}
\]
Given:
- Municipal Bond YTM = 5.53%
- Tax Rate = 28% = 0.28
Plug in the values:
\[
\text{Equivalent Pretax Yield} = \frac{5.53\%}{1 - 0.28} = \frac{5.53\%}{0.72}
\]
\[
\text{Equivalent Pretax Yield} \approx 7.68\%
\]
Therefore, the equivalent pretax yield on a taxable bond is approximately 7.68%.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F90ee7efd-5fa7-48ee-a3f2-9beae61f1076%2F710af4f7-5c54-43df-af48-18396dc816d5%2Fazpklrm_processed.png&w=3840&q=75)
Transcribed Image Text:**Problem: Evaluating Equivalent Pretax Yield on Taxable Bonds**
A municipal bond has a coupon rate of 5.83 percent and a Yield to Maturity (YTM) of 5.53 percent. If an investor has a marginal tax rate of 28 percent, what is the equivalent pretax yield on a taxable bond? If relevant, show calculator steps.
**Solution:**
To find the equivalent pretax yield on a taxable bond when given the YTM of a municipal bond, we use the formula:
\[
\text{Equivalent Pretax Yield} = \frac{\text{Municipal Bond YTM}}{1 - \text{Tax Rate}}
\]
Given:
- Municipal Bond YTM = 5.53%
- Tax Rate = 28% = 0.28
Plug in the values:
\[
\text{Equivalent Pretax Yield} = \frac{5.53\%}{1 - 0.28} = \frac{5.53\%}{0.72}
\]
\[
\text{Equivalent Pretax Yield} \approx 7.68\%
\]
Therefore, the equivalent pretax yield on a taxable bond is approximately 7.68%.
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