Question

A bond issued by the state of Alabama is priced to yield 7.15%. If you are in the 20% tax bracket, this bond would provide you with an equivalent taxable yield of _________.

Answer 1

8.94%

Explanation:

According to the given situation, the computation of the equivalent taxable yield is shown below:-

Equivalent taxable yield = (Yield) ÷ (1 - Tax)

= 7.15% ÷ (1 - 20%)

= 7.15% ÷ 80%

= 8.94%

Therefore we have applied the above formula to determine the equivalent taxable yield.

hence, the equivalent taxable bond is 8.94%