A 3%, 20-year annual coupon bond issued by the Fairfax County is priced to yield 5%....
A 3%, 20-year annual coupon bond issued by the Fairfax County is priced to yield 5%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of _____.
A. 6.94%
B. 4.17%
C. 3.16%
D. 5.61%
Homework Answers
Answer :
Equivalent taxable yield = Tax exempt yield / ( 1 - marginal tax rate )
Tax exempt yield = 5% (or) 0.05
Marginal tax rate = 28% (or) 0.28
Therefore,
Equivalent taxable yield = 0.05 / 1 - 0.28
= 0.06944 (or) 6.94%
The answer is option (A) i.e., 6.94%.
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