I’ve changed the terms to avoid any copyright hoopla: A municipal bond carries a coupon of 7% and is traded at par. To a taxpayer in the 34% tax bracket, this bond provides an equivalent taxable yield of: A) 10.61%. B) 7.00%. C) 9.09%. I chose B, as I thought muni bonds were tax exempt and figured this was a trick question (no tax levied, after tax yield equals current yield). The answer given by Schweser is A using the usual tax equivalent formula: Coupon / (1 - T) 7 / 0.66 = 10.61 Any explanation as to why a muni trading at par has a tax equivalent yield not equal to current yield in this instance?
a muni is not taxed so if you have a 10.61 corporate bond it will be taxed 0.34 and you would be left with 7, thus the taxable equivilant is a 10.61 corporate dont take this the wrrong way buddy, but IF you face a lot of such issues you better put a lot of work. it is too close to the exam for you to be wondering about this…it is a very basic question note i dont meen to freak you out, just an advice cause i dont want you to fail
Thanks, Chief. I glossed over the word “equivalent”. I don’t know how I just did 20 similar Q-Bank questions in a row then somehow lost my mind on this one. Note, a critique of my perceived study habits was not part of my original query, but thank you for your concern.
my bad.
Starting to get ugly around here.
Came back 12 years later to say go ■■■■ yourself.
I love a petty grievance (and that’s the pettiest ■■■■ I’ve seen in a minute), but you should really be making better use of your time. I just don’t want you to fail at life.
To the bro who respectfully and encouragingly suggested you study up based on your mental collapse, good on you and I hope you’re doing well.