Municipal Bonds
An investor in the 32% tax bracket is comparing a municipal bond yielding 4% to taxable bonds. What is the tax-equivalent yield of the municipal bond?
Tax-equivalent yield = Muni yield / (1 - tax rate) = 4% / (1 - 0.32) = 4% / 0.68 = 5.88%. This means the investor would need a taxable bond yielding 5.88% to equal the 4% municipal bond on an after-tax basis.
Complete Analysis & Legal Rationale
Tax-equivalent yield = Muni yield / (1 - tax rate) = 4% / (1 - 0.32) = 4% / 0.68 = 5.88%. This means the investor would need a taxable bond yielding 5.88% to equal the 4% municipal bond on an after-tax basis.
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.
Does not match the governing securities rule described in the explanation.
Matches the verified teaching point 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.