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

What is the incoming taxable yield formula for corporate bonds?

1. Taxable Yield x Tax Bracket %

2. Taxable Yield x (100% + Tax Bracket %)

3. Taxable Yield x (100% - Tax Bracket %)

4. Taxable Yield + Tax Bracket %

The correct answer is: Taxable Yield x (100% - Tax Bracket %)

The incoming taxable yield formula for corporate bonds is designed to account for the impact of taxes on the income generated by the bonds. The correct formula reflects how taxable income is calculated after accounting for a percentage of income that goes to taxes. When determining the after-tax yield on a corporate bond, the taxable yield is multiplied by the factor that represents the portion of it that remains after taxes are paid. This is expressed as (100% - Tax Bracket %), because it essentially calculates the net yield to the investor after subtracting the tax liability from the gross yield. For example, if a corporate bond has a taxable yield of 5% and the investor is in a 30% tax bracket, the portion of the yield that the investor keeps is calculated by taking 5% multiplied by (100% - 30%), which would give them an after-tax yield of 3.5%. Thus, this formula effectively reflects the income that an investor actually retains after fulfilling their tax obligations, which is a key consideration in evaluating the attractiveness of corporate bonds compared to other investment options. In contrast, other options would not provide the correct after-tax yield because they do not appropriately account for the taxes owed. The correct understanding is crucial for making informed investment decisions regarding