The formula to calculate the Tax Equivalent Yield is:
\[ \text{Tax Equivalent Yield} = \frac{\text{Bond Yield}}{1 - \text{Marginal Tax Rate}} \]
The tax equivalent yield is a way to compare the yields of taxable and tax-exempt bonds. It calculates the yield that a taxable bond would need to offer in order to equal the yield on a tax-exempt bond. This is useful for investors in different tax brackets to determine the true return on investment.
Let's assume the following:
Step 1: Calculate the tax equivalent yield:
\[ \text{Tax Equivalent Yield} = \frac{6\%}{1 - 0.30} = \frac{6\%}{0.70} = 8.571\% \]
Therefore, the Tax Equivalent Yield is 8.571%.
