After tax yield on muni bond on QBank equivalent, copyright, provides

hanvinh

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?

jawz

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

farrukhsadiq

Thanks, Chief.
I glossed over the word “equivalent”. I don’t know how I just did 20 similar QBank 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.

Gypsy

Starting to get ugly around here.