Answered

A bond issued by the state of Alabama is priced to yield 6.40%. If you are in the 30% tax bracket, this bond would provide you with an equivalent taxable yield of _________.

a. 4.48%
b. 7.40%
c. 9.14%
d. None of these options

Answer :

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If you are in the 30% tax bracket, this bond would provide you with an equivalent taxable yield of c. 9.14%.

Equivalent taxable yield

Using this formula

Equivalent taxable yield=Bond price/(1-Tax rate)

Where:

Bond price=6.40%

Tax rate=30%

Let plug in the formula

Equivalent taxable yield= 6.40%/(1 - 0.30)

Equivalent taxable yield=6.40%/70%

Equivalent taxable yield=9.14%

Inconclusion if you are in the 30% tax bracket, this bond would provide you with an equivalent taxable yield of c. 9.14%.

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