An investor in the 32% federal tax bracket is comparing a municipal bond yielding 3.5% to a corporate bond. What taxable-equivalent yield does the muni bond provide?

Why B — 5.15%

Tax-equivalent yield = tax-exempt yield / (1 - tax rate) = 3.5% / (1 - 0.32) = 3.5% / 0.68 = 5.15%. This means the investor would need a corporate bond yielding at least 5.15% to match the after-tax return of the 3.5% municipal bond. Multiplying by (1 - tax rate) would produce 2.38%, which is the after-tax yield of a taxable bond, not the taxable-equivalent yield of the municipal bond.