University of Central Florida (UCF) FIN2100 Personal Finance and Investments Final Practice Exam

To find the comparable pre-tax yield on a municipal bond, you can use the formula for calculating the equivalent taxable yield, which is particularly useful for investors in higher tax brackets. The formula is:

\[ \text{Equivalent Taxable Yield} = \frac{\text{Tax-Exempt Yield}}{1 - \text{Tax Rate}} \]

In this case, the tax-exempt yield is 5.2%, and the marginal tax bracket is 25%. Substituting these values into the formula gives:

\[ \text{Equivalent Taxable Yield} = \frac{5.2\%}{1 - 0.25} \]

Calculating the denominator,

\[ 1 - 0.25 = 0.75 \]

Now, dividing the yield by this value,

\[ \frac{5.2\%}{0.75} = 6.9333\% \]

Rounding this value results in approximately 6.9% as the equivalent taxable yield. This yield represents what an investor would need to earn on a taxable bond to match the after-tax income from the municipal bond yielding 5.2%.

Therefore, the comparable pre-tax yield of the municipal bond, when considering the investor