Question

A bank is considering two securities: a 30-year Treasury bond yielding 6 percent and a 30-year municipal bond yielding 5 percent. a. If the bank’s tax rate is 25 percent, calculate the Treasury bond's after-tax yield. (Round your answer to 1 decimal place.

Answer 1

To calculate the after-tax yield of a Treasury bond, you multiply the bond's yield by (1 minus the tax rate). For a 30-year Treasury bond with a 6 percent yield and a 25 percent tax rate, the after-tax yield is 4.5 percent.

Step-by-step explanation:

You have asked how to calculate the after-tax yield of a 30-year Treasury bond with a yield of 6 percent if the bank's tax rate is 25 percent. To find the after-tax yield, we multiply the bond's yield by (1 minus the tax rate). Here is the calculation:

After-tax yield = Treasury bond yield × (1 - tax rate)

After-tax yield = 6% × (1 - 0.25)

After-tax yield = 6% × 0.75

After-tax yield = 4.5%

So, the after-tax yield on the 30-year Treasury bond for the bank, given a tax rate of 25 percent, would be 4.5 percent when rounded to one decimal place.