Math Problem Statement
A municipal bond has a coupon rate of 5.98 percent and a YTM of 5.63 percent. If an investor has a marginal tax rate of 30 percent, what is the equivalent pretax yield on a taxable bond?
Multiple Choice
3.94%
8.04%
6.11%
4.19%
8.54%
Solution
To find the equivalent pretax yield on a taxable bond, we can use the formula:
In this case:
- Municipal Bond Yield (YTM) = 5.63%
- Tax Rate = 30% or 0.30
Plugging in the values:
Answer:
The correct answer is 8.04%.
Would you like further details on the steps, or have any questions?
Here are five additional related questions:
- How would a higher marginal tax rate affect the equivalent pretax yield?
- What would the equivalent taxable yield be if the municipal bond yield was higher?
- How does the tax rate impact the comparison between municipal and taxable bonds?
- How is the YTM of a bond different from its coupon rate?
- Why might investors prefer municipal bonds despite lower yields?
Tip: Municipal bonds are often attractive to investors in higher tax brackets due to their tax-exempt status.
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Math Problem Analysis
Mathematical Concepts
Finance
Bonds
Taxable Equivalent Yield
Formulas
Equivalent Pretax Yield = Municipal Bond Yield / (1 - Tax Rate)
Theorems
-
Suitable Grade Level
College Level / Finance and Investment Courses
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