Municipal Bonds
An investor in the 32% federal tax bracket is considering a municipal bond yielding 3.5%. What is the tax-equivalent yield?
Tax-Equivalent Yield = Municipal Yield / (1 - Tax Rate) = 3.5% / (1 - 0.32) = 3.5% / 0.68 = 5.15%. This means a taxable bond would need to yield 5.15% to equal the after-tax return of this 3.5% municipal bond.
Complete Analysis & Legal Rationale
Tax-Equivalent Yield = Municipal Yield / (1 - Tax Rate) = 3.5% / (1 - 0.32) = 3.5% / 0.68 = 5.15%. This means a taxable bond would need to yield 5.15% to equal the after-tax return of this 3.5% municipal bond.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Does not match the governing securities rule described in the explanation.
Does not match the governing securities rule described in the explanation.
Matches the verified teaching point in the explanation.
Does not match the governing securities rule described in the explanation.
Official Standard: Outline-level citation: item maps to Series 7 topic coverage. Prefer a specific FINRA/SEC/MSRB rule citation in a later author pass.