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%

To find the equivalent pretax yield on a taxable bond, we can use the formula:

\[
\text{Equivalent Pretax Yield} = \frac{\text{Municipal Bond Yield}}{1 - \text{Tax Rate}}
\]

In this case:
- **Municipal Bond Yield (YTM)** = 5.63%
- **Tax Rate** = 30% or 0.30

Plugging in the values:

\[
\text{Equivalent Pretax Yield} = \frac{5.63\%}{1 - 0.30} = \frac{5.63\%}{0.70} = 8.04\%
\]

### Answer:
The correct answer is **8.04%**.

Would you like further details on the steps, or have any questions?

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Here are five additional related questions:
1. How would a higher marginal tax rate affect the equivalent pretax yield?
2. What would the equivalent taxable yield be if the municipal bond yield was higher?
3. How does the tax rate impact the comparison between municipal and taxable bonds?
4. How is the YTM of a bond different from its coupon rate?
5. 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.

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?

Understand how to calculate the equivalent pretax yield on a taxable bond using a municipal bond with a yield of 5.63% and a 30% marginal tax rate. This finance question explores the taxable equivalent yield formula and is ideal for college-level finance students.

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