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10 December, 21:36

Sandra is in the 28% tax bracket and purchased a corporate bond at par with a 12% coupon rate. What is the equivalent yield for a municipal bond?

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  1. 10 December, 21:57
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    Equivalent Yield=8.64%

    Explanation:

    The Sandra will be getting 28% of tax benefit on its interest cost.

    The equivalent yield for a municipal bond can be calculated by the Sandra Using the following formula:

    Equivalent Yield=Coupon Rate (1-tax rate)

    Coupon rate=12%

    tax rate=28%

    Equivalent Yield=12% (1-28%)

    =12% (72%)

    =8.64%
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