Explanation:
The Tax Equivalent Yield (TEY) can be calculated using the formula:
TEY = Tax-Exempt Yield / (1 - Marginal Tax Rate)
Given:
TEY = 4.20% / (1 - 0.30) = 4.20% / 0.70 = 6.00%
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20.5.2. If a corporation's marginal tax rate is 30.0% and it purchases an A-rated municipal bond that offers a 4.20% gross yield (aka, yield to maturity), what is the tax equivalent yield (TEY)?
A
2.45%
B
3.50%
C
6.00%
D
16.67%