Tax-equivalent yield calculations 1. a. 2. 3. Taxable equivalent yield = Tax-exempt yield (1 - marginal tax rate) Suppose the yield on a taxable fund is 1.50 percent, whereas the yield on a tax-free fund is 1 percent. The investor's marginal tax rate is 28 percent. What is the tax-equivalent yleld? b. Which would the investor prefer: the tax-free fund or the taxable fund? How much you would need to earn on a taxable bond to equal your 6 percent after-tax rate that you can earn on municipal bonds if your marginal tax rate is 27 percent? What is the yield on a tax-exempt municipal bond that is equivalent to a 6% yield on a taxable bond if your marginal tax rate is 25%? b. 35%? Suppose you are subject to both a federal income tax rate of 35% and a state income tax rate of 5%. If you can earn 5% on a tax-exempt security, what is the equivalent taxable equivalent yield? Complete the following table with taxable equivalent yields: Tax-exempt yield Marginal tax rate 25% 30% 35% 3% a. 4. 5. 4% 5% 6%