What is the tax-exempt equivalent yield on a 6% bond yield given a marginal tax rate of 25%?

To find the **tax-exempt equivalent yield** of a bond, you can use the following formula:

\[
\text{Tax-Exempt Equivalent Yield} = \text{Taxable Yield} \times (1 - \text{Tax Rate})
\]

In this case:
- The taxable bond yield is 6%, or 0.06.
- The tax rate is 25%, or 0.25.

Plugging the values into the formula:

\[
\text{Tax-Exempt Equivalent Yield} = 0.06 \times (1 - 0.25) = 0.06 \times 0.75 = 0.045
\]

So, the tax-exempt equivalent yield is **4.5%**.

This means a tax-free bond offering a 4.5% yield would be equivalent to a taxable bond yielding 6% for someone in the 25% tax bracket.

Would you like more details or have any questions?

Here are five related questions to explore further:
1. What is the difference between taxable and tax-exempt bonds?
2. How does the marginal tax rate impact investment decisions?
3. What are municipal bonds, and why are they often tax-exempt?
4. How do you calculate after-tax returns on various investments?
5. What other factors should you consider when choosing between taxable and tax-exempt bonds?

**Tip:** When comparing bonds, always consider both the yield and the tax implications to understand the true return.

Learn how to calculate the tax-exempt equivalent yield of a bond with a 6% taxable yield and a marginal tax rate of 25%. This guide explains the key formula, how taxation affects bond yields, and the impact on investment decisions.

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