Answer:pretax yield = 5.11 x 1.35 = 6.8985 = 6.90%
Explanation:
a pretax yield is a yield that a taxable bond must have in order for the yield to equal to a yield of a bond that is tax free
pretax yield = 5.11 x 1.35 = 6.8985 = 6.90%
Based on the YTM on the municipal bond, the equivalent pretax yield on a taxable bond is 7.30%.
An equivalent yield for this bond can be found by accounting for the effect of taxation on the yield of the municipal bond.
This can be done as:
= YTM on municipal bond x ( 1 + tax rate)
Solving gives:
= 5.41% x ( 1 + 35%)
= 7.30%
Find out more on municipal bonds at https://brainly.com/question/14116276.
