Question
Find the equivalemt taxable yield of a short-term municipal bond with a yield of $4 \%$ for tax brackets of (a) zero, (b) $10 \%$, (c) $20 \%$, and (d) $30 \%$.
Step 1
The equivalent taxable yield is the yield an investor would need to earn on a taxable bond to equal the yield of a tax-exempt bond, such as a municipal bond. The formula to calculate the equivalent taxable yield (ETY) is: \[ ETY = \frac{Y}{1 - T} \] where \(Y\) Show more…
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A municipal bond carries a coupon rate of $63 / 4 \%$ and is trading at par. What would be the equivalent taxable yield of this bond to a taxpayer in a $35 \%$ tax bracket?
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