Being in the 28% tax bracket the bond will provide an equivalent taxable yield of 8.68%. So, the appropriate answer choice is option (c).
What is tax equivalent yield ?The return required by a taxable bond to match the yield of an equivalent tax-exempt municipal bond is known as the tax-equivalent yield. In general, tax consequences are a challenging, significant, and frequently ignored component of any financial strategy. Investors might benefit from the tax-equivalent yield computation, especially those in higher tax brackets. The yield on a taxable bond that an investor would need to earn in order to match the return on a comparable tax-free municipal bond is known as the tax-equivalent yield.
Since municipal bonds typically have low expected returns, the true impact of investing in them to save on taxes is frequently difficult to fully quantify. The computation aids the investor in choosing between taxable and tax-free investments, like tax-free municipal bonds. This knowledge is essential since it might be challenging to match municipal bonds' tax-free benefit with other investments.
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