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

Question: 1 / 400

What is the taxable equivalent yield of a municipal bond with an 8% tax-exempt rate and a marginal tax rate of 39%?

11.12%

4.88%

13.11%

To find the taxable equivalent yield of a municipal bond, you use the formula:

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

In this case, the tax-exempt rate of the municipal bond is 8%, and the marginal tax rate is 39%. Plugging these values into the formula gives:

Taxable Equivalent Yield = 8% / (1 - 0.39)

This simplifies to:

Taxable Equivalent Yield = 8% / 0.61

Calculating that:

Taxable Equivalent Yield ≈ 13.11%

This result indicates that to match the after-tax yield of the municipal bond yielding 8%, an investor would need to earn approximately 13.11% on a fully taxable investment, considering they are subject to a 39% tax rate. This insight is crucial for investors making decisions based on their tax situations, as it helps them assess the attractiveness of a tax-exempt municipal bond in comparison to taxable investments.

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