Municipal Debt

Question 1

Chapter 7 – Municipal Debt

How do you calculate a municipal bond’s Taxable Equivalent Yield?

Answer 1

Taxable Equivalent Yield = Municipal Yield / (100% – Tax Bracket %)

This formula helps investors compare the yield of municipal bonds, which are often tax-exempt, to taxable bonds.

Question 2

Chapter 7 – Municipal Debt

What is the formula for calculating a taxable bond’s Net (After-Tax) Yield?

Answer 2

Net (After-Tax) Yield = Taxable Yield x (100% – Tax Bracket %)

This calculation adjusts the yield based on the investor’s tax bracket.

Question 3

Chapter 7 – Municipal Debt

To determine the capital gain or loss of a municipal bond purchased at a premium and sold prior to maturity, what formula is used?

Answer 3

Sale Price – Amortized Basis

This formula accounts for the amortization of the premium paid for the bond.

Question 4

Chapter 7 – Municipal Debt

If a 10-year bond is purchased for $1,200 and sold for $1,100 after six years, what is the capital gain or loss?

Answer 4

$20 capital gain

The bond is amortized by $20 each year, leading to an adjusted basis of $1,080 after six years.

Question 5

Chapter 7 – Municipal Debt

What is the annual amortization amount for a bond purchased at a $200 premium over 10 years?

Answer 5

$20 per year

This is calculated as $200 premium ÷ 10 years.

Question 6

Chapter 7 – Municipal Debt

Fill in the blank: The amortized basis of a bond after six years, purchased at a premium, is _______.

Answer 6

$1,080

This is the original purchase price minus the total amortization over six years.