Series 7 practice questioneasyTax Implications — Tax-Equivalent Yield
The tax-equivalent yield formula is:
- AMunicipal yield x (1 - Tax rate)
- BMunicipal yield / (1 - Tax rate)✓ Correct answer
- CCorporate yield / (1 - Tax rate)
- DCorporate yield x (1 - Tax rate)
Explanation
Why B — Municipal yield / (1 - Tax rate)
The tax-equivalent yield formula is: Tax-Equivalent Yield = Municipal Bond Yield / (1 - Marginal Tax Rate). This converts a tax-exempt yield into the equivalent taxable yield, allowing investors to compare municipal bonds with taxable alternatives. The formula works because the denominator adjusts for the tax savings the investor receives from tax-exempt income.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 758+ Series 7 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Spot an error in this question or explanation? Tell us — we fix these fast.
Related Investment Information & Recommendations questions
- An investor in the 24% tax bracket earns 3.00% on a municipal bond. A corporate bond yields 4.25%. Which provides a…
- Interest on U.S. Territory bonds (such as Puerto Rico, Guam, and the Virgin Islands) is:
- Net capital losses can be deducted against ordinary income up to a maximum of how much per year for an individual…
- An investor who is a resident of New York purchases a California municipal bond. The interest income is:
- An investor sells 200 shares of MNO stock at a $4,000 loss on November 1. On October 15, the investor had purchased 100…
- A grandmother bought stock at $20 per share. She gifts it to her grandson when the fair market value is $15. The…
- Which of the following municipal bond types would NOT create an AMT preference item?
- When securities are inherited from a deceased person, the beneficiary's cost basis is: