Question

A municipal bond has a coupon rate of 6.04 percent and a YTM of 5.67 percent. If an investor has a marginal tax rate of 39 percent, what is the equivalent pretax yield on a taxable bond?

A) 3.46%

B) 9.90%

C) 3.68%

D) 6.49%

E) 9.30%

Answer 1

E) 9.30%

Equivalent pretax yield on a taxable bond = YTM / (1 - Tax rate)

Equivalent pretax yield on a taxable bond = 0.0567 / (1 - 0.39)

Equivalent pretax yield on a taxable bond = 0.0930 or 9.30%