Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What is the taxable yield for a corporate bond owned by an investor in a 28% tax bracket with an 8.5% yield?

1. 6.12%

2. 5.96%

3. 7.88%

4. 8.5%

The correct answer is: 6.12%

To determine the taxable yield for a corporate bond held by an investor, especially one in a specific tax bracket, you need to account for the tax impact on the bond's yield. In this case, the investor has an 8.5% yield on the corporate bond and is in a 28% tax bracket. The formula used to find the after-tax yield is: After-tax yield = Yield * (1 - Tax Rate) Inserting the given values into the formula: After-tax yield = 8.5% * (1 - 0.28) After-tax yield = 8.5% * 0.72 After-tax yield = 6.12% This yield of 6.12% reflects the income the investor actually retains after accounting for the taxes owed on the income generated by the bond. This calculation illustrates the important concept of how tax hierarchy affects investment returns, particularly for taxable corporate bonds. Thus, the taxable yield of 6.12% represents the actual yield an investor can expect to earn after the impact of taxation. This highlights how important it is for investors to understand their tax brackets when calculating the effective yield on investments.