Investments Formula #3

Question 1

What is this formula?
TEY=r/(1-t)

Answer 1

Tax equivalent yield

Question 2

When do you use this formula?

Answer 2

When the question asked for the tax equivalent yield of a municipal or federal bond

Question 3

What does the T stand for?

Answer 3

Marginal Tax rate person is paying

Question 4

Do you use decimals or whole numbers for percentages?

Answer 4

Decimals

Question 5

True or false
Out-of-state municipal bonds will pay in-state tax

Answer 5

T

Question 6

What does R stand for?

Answer 6

The interest rate of the municipal (or federal bond)

Question 7

If Tammy owns a municipal bond that pays 5% assuming that she is in a 35% marginal tax bracket what yield incorporate bonds is comparable to the yield on Millie’s current investment

Answer 7

5/1-.35=7.69%

Question 8

Bill’s marginal tax bracket is 12%. He is considering either a corporate bond that pays 7% or a tax exempt municipal bond paying 5.5% which bond should he take?

Answer 8

T Equiv Y x )1-marginal tax rate)
7% x (1-.12)=6.16%

Question 9

What is the current TEY on this muni bonds.
Purchased:$950
6% coupon
10 year maturity $1050
Currently worth: $980
Tax bracket 36%

Answer 9

$60/980=6.12%
6.12/1-.36=9.56%
Question 52 in Investment Final