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- 2011-7-11
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- 2013-8-22
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after-tax yield question in qbank
Hi guys,
i have a question from qbank which i like to seek some clarification.
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A municipal bond selling at 12% above par offers a yield of 3.2%. A taxable Treasury note selling at an 8% discount offers a yield of 4.6%. An investor in the 32.5% tax bracket wishes to purchase an equal dollar amount of both bonds. The after-tax yield of the two-bond portfolio is closest to:
A) 4.67%.
B) 2.63%.
C) 3.15%.
Your answer: B was incorrect. The correct answer was C) 3.15%.
The after-tax yield of the Treasury note is the stated yield times one minus the tax rate, or 4.6% times 67.5%, or 3.1%. To calculate the portfolio yield, take the average after-tax yields of both bonds, which is 3.15%.
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My calculations are:
municipal bond = 0.0032 * (1-0.325) * 0.5 = 1.55
Treasury note = 0.0046 * (1-0.325) * 0.5 = 1.08
1.05 + 1.08 = 2.63%
The answer from qbank seems like it never include the municipal bond in the calculation. Is it because it is tax exempt?
thanks |
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发表于 2011-7-13 14:21
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