Frequently Asked Question
An investor is in the 36% tax bracket and holds municipal bonds with an 8% yield-to-maturity. What is the equivalent taxable yield?
A. 8.0%
B. 22.2%
C. 9.3%
D. 12.5%
Correct answer: D
"A" divides 1-minus-tax-rate by the tax-exempt yield, instead of vice versa, and the sloppy mathematician will not notice the order-of-magnitude problem and will read "8" as "8%". "B" divides the tax-exempt yield by the tax rate, not 1-minus-tax-rate. "C" is just a guess.
B. 22.2%
C. 9.3%
D. 12.5%
Correct answer: D
"A" divides 1-minus-tax-rate by the tax-exempt yield, instead of vice versa, and the sloppy mathematician will not notice the order-of-magnitude problem and will read "8" as "8%". "B" divides the tax-exempt yield by the tax rate, not 1-minus-tax-rate. "C" is just a guess.
by
Peter Cherewyk
Peter Cherewyk has worked in the financial field for over 10 years. He completed his Bachelor of Commerce from the University of Alberta, and is currently working towards a Chartered Financial Analyst designation. He enjoys hockey and hiking and the opportunity to teach others.
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