Question

what is the effective yield the investor would expect if the tax rate of the investor is 30% and the nominal yield offered on a taxable investment is 12%

Answer 1

$\huge\purple{solution}$

Calculating Tax Equivalent Yield

1.Find the reciprocal of your tax rate (1 – your tax rate). If you pay 25% tax, your reciprocal would be (1 - . 25) = . 75, or 75%.

2.

Divide this amount into the yield on the tax-free bond to find out the TEY. For example, if the bond in question yields 3%, use (3.0 / . 75) = 4%.

$\huge\purple{ Explain}$

The amount remaining after taxes are taken out is known as the effective after-tax yield. For example, if someone earns $1,000 in dividends on an investment, but they have to pay 20 percent in taxes, they really only earned $800 — their after-tax dividend yield.

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