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?

Multiple Choice

9.90%

3.68%

9.30%

3.46%

6.49%

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

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

Where:
- Municipal Bond Yield = Yield to Maturity (YTM) of the municipal bond = 5.67%
- Tax Rate = 39% = 0.39

Now, plugging in the values:

\[
\text{Equivalent Pretax Yield} = \frac{5.67\%}{1 - 0.39} = \frac{5.67\%}{0.61}
\]

Let’s calculate that.

\[
\text{Equivalent Pretax Yield} = 9.30\%
\]

So, the correct answer is:

**9.30%**

Would you like further details or have any questions?

### Related Questions:
1. What is the difference between coupon rate and yield to maturity (YTM)?
2. How is the marginal tax rate determined for an investor?
3. Why might an investor prefer municipal bonds over taxable bonds?
4. How do changes in tax rates affect the equivalent pretax yield?
5. What are the risks associated with investing in municipal bonds?

**Tip:** Municipal bonds are often attractive to investors in higher tax brackets because their interest income is typically exempt from federal taxes.

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?

Learn how to calculate the equivalent pretax yield on a taxable bond, given a municipal bond with a coupon rate of 6.04% and a YTM of 5.67%. Understand the role of marginal tax rates (39%) in bond yield calculations. This step-by-step solution is ideal for finance students and professionals.

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