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    Computing After-tax Equivalent Yield

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    If a corporate bond paid 9 percent interest, and you are in the 28 percent income tax bracket, what rate would you have to earn on a general obligation municipal bond of equivalent risk and maturity in order to be equally well off? Given that municipal bonds are often not easily marketable, would you want to earn a higher or lower rate than the rate you just calculated?

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    Solution Preview

    If a corporate bond paid 9 percent interest, and you are in the 28 percent income tax bracket, what rate would you have to earn on a general obligation municipal bond of equivalent risk and maturity in order to be equally well off? ...

    Solution Summary

    This solution illustrates how to compute a municipal bond's after-tax equivalent yield and discusses the liquidity premium.

    $2.19

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