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Zorluk: Çok zorGovernment, Municipal, and Corporate Bonds

An investor residing in North Carolina is subject to a 20%20\% federal marginal income tax rate and a 5%5\% state income tax rate. The investor is considering purchasing an out-of-state municipal bond offering a yield of 4.50%4.50\%. Because the bond is issued by an out-of-state entity, its interest is exempt from federal income tax but subject to North Carolina state income tax. What is the equivalent yield (in percent) that a fully taxable corporate bond must offer to provide the investor with the exact same after-tax yield?

Cevap: 5.7 %

Cevap

The taxable corporate bond must offer a yield of 5.70%.
To find the corporate yield that matches the after-tax return of an out-of-state municipal bond, first calculate the municipal bond's after-tax yield accounting for state taxation: 4.50%×(1−0.05)=4.275%4.50\% \times (1 - 0.05) = 4.275\%. Next, because corporate bond interest is subject to both federal and state taxes (20%+5%=25%20\% + 5\% = 25\% combined tax rate), set the after-tax corporate return equal to 4.275%4.275\%: Corporate Yield×(1−0.25)=4.275%\text{Corporate Yield} \times (1 - 0.25) = 4.275\%. Solving yields Corporate Yield=4.275%0.75=5.70%\text{Corporate Yield} = \frac{4.275\%}{0.75} = 5.70\%.

Adım Adım Çözüm

1
Calculate the after-tax yield of the out-of-state municipal bond
4.275%
Municipal bond interest is exempt from federal income tax but taxable by the investor's home state when issued out-of-state. Thus, After-Tax Yield = 4.50% * (1 - 0.05) = 4.275%.
2
Calculate the combined tax rate applicable to corporate bond interest
25%
Corporate bond interest is fully taxable at both federal (20%) and state (5%) levels: 20% + 5% = 25%.
3
Compute the required corporate tax-equivalent yield
5.70%
Divide the after-tax yield of 4.275% by (1 - combined tax rate): 4.275% / (1 - 0.25) = 5.70%.

Anahtar Kavram

Tax-Equivalent Yield for Out-of-State Municipal Bonds vs Fully Taxable Corporate Debt
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Konular

Government, Municipal, and Corporate Bonds

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