CFA Practice Question

CFA Practice Question

An investor is considering investing in taxable bonds or tax-exempt municipal securities over a 5-year horizon. Similar risk corporates offer a pre-tax yield of 5.80% and munis offer a yield of 3.30%. The investor should be in a marginal tax bracket ______.
A. greater than 43.1% to benefit from investing in munis
B. greater than 38.9% to benefit from investing in munis
C. below 43.1% to benefit from investing in munis
Explanation: The break-even tax rate, where the two securities offer the same after-tax yield, is (1 - 0.033/0.058) = 0.431, or 43.1%.

If an investor is in a higher tax bracket, he will benefit from investing in munis. For example, if the investor's tax rate is 45%, the after-tax yield from corporates would equal 3.19% (= 5.80 x 0.55), which is less than the after-tax yield of 3.3% on the munis.

User Contributed Comments 4

User Comment
copus easy question....i don`t think there will be many of these in the June level 1 exam!
tijean25 Being question 94 out of 120 there is no such thing as easy question when you have been tested for close to 2 and half hour, especially if that was afternoon session that will make it close to 5 hours. The brain may have already stopped working an hour ago
thebkr7 @tijean25 hahaha I know what you mean...
will080912 Can someone explain it please?, I can find non of those terms.
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