Question 2-16I

Expert-verifiedFound in: Page 50

Book edition
9th

Author(s)
Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus

Pages
748 pages

ISBN
9780078034695

**Find the equivalent taxable yield of the municipal bond in Problem 14 for tax brackets of zero, 10%, 20%, and 30%.**

With zero- taxable bonds,

With 10% tax bracket - taxable bonds

With 20% tax bracket – either one of these

With 30% tax bracket - municipal bonds

**The state and local governments issue municipal bonds. These bonds are tax exempt bonds.**

With zero tax bracket, the after tax yield is the same as before tax-yield that is 5%. This is greater than the yield on the municipal bond that is 4%. Therefore the correct answer is taxable bonds.

With 10% tax bracket, the after-tax yield for the taxable bond would be:

r(1 – t) r_{muni}

5%(1-10%) = r _{muni}

=4.5%

This is greater than the yield on the municipal bond that is 4%. Therefore the correct answer is taxable bonds.

With 20% tax bracket, the after-tax yield for the taxable bond would be:

r(1-t) = r _{muni}

5%(1-20%) = r _{muni}

=4 %

This is equal to that of the yield on the municipal bond that is 4%. Therefore the correct answer is either one of these.

With 30% tax bracket, the after-tax yield for the taxable bond would be:

r(1 – t) r_{muni}

5%(1-30%) = r _{muni}

= 3.5 %

This is less than that of the yield on the municipal bond that is 4%. Therefore the correct answer is municipal bonds.

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