A municipal bond has a coupon rate of 5.92 percent and a YTM of 5.59 percent. If an investor has a marginal tax rate of 39 percent, what is the equivalent pretax yield on a taxable bond? a a. \( 6.39 \% \) ob. \( 3.41 \% \) o c. \( 9.70 \% \) d. \( 3.61 \% \) e. \( 9.16 \% \)

To find the equivalent pretax yield on a taxable bond, we can use the formula for converting the tax-exempt yield of a municipal bond to a taxable equivalent yield: \[ \text{Taxable Equivalent Yield} = \frac{\text{Municipal Bond Yield}}{1 - \text{Tax Rate}} \] In this case, using the coupon rate of 5.92% and a marginal tax rate of 39%, we have: \[ \text{Taxable Equivalent Yield} = \frac{5.92\%}{1 - 0.39} = \frac{5.92\%}{0.61} \approx 9.70\% \] So, the answer is (c) 9.70%. A little bonus: Municipal bonds, often issued by cities or states, are a great tax-saving investment option, especially for those in higher tax brackets. They allow investors to sidestep taxes on interest earned, which means your money can grow a bit more efficiently. Additionally, don’t forget to consider liquidity, credit ratings, and duration when investing in municipal bonds—they can change the risk and return dynamics!