Three friends, Jodie, Natalie, and Neil, have asked you to determine the equival
ID: 2807293 • Letter: T
Question
Three friends, Jodie, Natalie, and Neil, have asked you to determine the equivalent taxable yield on a municipal bond. The bond's current yield is 4.35 percent with five years left until maturity. Jodie is in the 15 percent marginal tax bracket, Natalie is in the 25 percent bracket, and Neil is in the 35 percent bracket. Calculate the equivalent taxable yield for your three friends. Assuming a similar AAA corporate bond yields 4.85 percent, which of your friends should purchase the municipal bond?
Question-The equivalent taxable yield for Jodie who has a 15 percent marginal tax bracket is ____ %.(Round to two decimal places.)
Explanation / Answer
Equivalent taxable yield= R(te)= R(tf)/(1-t)
Jodie's equivalent T.Y= 4.35/(1-0.15)= 5.1176
Nataile= 4.35/(1-0.25)= 5.8
Niel= 4.35/(1-0.35)= 6.6923
For a similar AAA rated bond equivalent yield
1. Jodie= 4.85/(1-0.15)= 5.705
2. Nataile= 4.85/(1-0.25)= 6.466
3. Niel= 4.85/(1-0.35)= 7.42
Hence Jodie can purchase the AAA rated bond as his equivalent tax yields are approximately equal.