Yield ratio

CFA Level I
#1

Tax exempt yield = 5% T security yield for otherwise identical bond = 6 % Tax rate = 30% What is the yield ratio and the yield spread?

#2

Yield ratio = 6/5 =1.2 Yield spread (6-5)/6 = .167 are these right?

#3

yield spread is 6-5 = 1??

#4

I think that you need to either put the tax exempt yield into comparison of the taxable yield bond, or put the taxable yield bond into comparison of the tax exempt bond. Tax exempt yield = 5% Equivalent taxable yield = 5/(.7) = 7.14 percent Thus, yield ratio would equal 7.14/6 = 1.19 If I remember right, the yield spread is simply yield call - 1, so it would equal 0.19 in this case.

#5

yield spread = higher yield - lower yield relative yield ratio = yield spread/lower yielding bond yield ratio = yield of bond X/treasury bond yield

#6

and i also agree with rlange in that you need to adjust the muni for taxes

#7

I disagree. You shouldn’t adjust the spread for taxes unless it is asking for a tax adjusted yield spread.

#8

thought about it more, and think you are right mcf.

#9

… but don’t you just love it when they give you that added unnecessary tax rate… left second guessing yourself…

#10

oh yah…can’t get enough of it