An investor in the 32% federal tax bracket is comparing a 4% municipal bond with a taxable corporate bond. What taxable-equivalent yield must the corporate bond offer to match the municipal?

Explanation

Taxable-equivalent yield equals the municipal yield divided by (1 minus the tax rate): 4% / (1 - 0.32) = 4% / 0.68 = 5.88%. A taxable bond must yield about 5.88% to give the same after-tax return as the 4% municipal.