Banking Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

Question: 1 / 400

If a bank owns a municipal bond with a tax-exempt rate of 5% and a marginal tax rate of 35%, what is the taxable equivalent yield?

7.69%

To find the taxable equivalent yield of a municipal bond, the formula used is:

Taxable Equivalent Yield = Tax-Exempt Rate / (1 - Marginal Tax Rate)

In this scenario, the bank owns a municipal bond with a tax-exempt rate of 5% (or 0.05) and has a marginal tax rate of 35% (or 0.35).

Substituting these values into the formula:

Taxable Equivalent Yield = 0.05 / (1 - 0.35)

= 0.05 / 0.65

= 0.076923, or approximately 7.69%.

Thus, the taxable equivalent yield of 7.69% represents the yield an investor would need to earn on a taxable bond to achieve the same after-tax return as the 5% tax-exempt municipal bond. This value helps investors compare tax-free municipal bonds with taxable investments, allowing them to make more informed decisions about where to allocate their funds for optimal returns considering their tax situation.

Get further explanation with Examzify DeepDiveBeta

3.25%

6.75%

3.70%

Next Question

Report this question

Subscribe

Get the latest from Examzify

You can unsubscribe at any time. Read our privacy policy