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A tax-exempt municipal bond with a coupon rate of 8.00% has a market price of 98.76%...

A tax-exempt municipal bond with a coupon rate of 8.00% has a market price of 98.76% of par. The bond matures in 8.00 years and pays semi-annually. Assume an investor has a 18.00% marginal tax rate. The investor would prefer otherwise identical taxable bond if it's yield to maturity was more than _____%

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Answer #1

Bond Par Value = $1,000

Bond Price = $987.60

Time Period = 8 years

Coupon Rate = 8% semi-annually

Calculating YTM of Municipal Bond,

Using TVM Calculation,

I = [PV = 987.60, FV = 1,000, PMT = 40, N = 16]

I = 8.21%

Equivalent Taxable Yield = 0.0821/(1 - 0.18)

Equivalent Taxable Yield = 10.01%

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