NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Debt Products
Caselet: Ms. Meera Nair, a resident individual in the 30% slab (ignore cess and surcharge), has Rs 10,00,000 to invest for one year. Option P is a taxable bank deposit at 7.5% per annum. Option Q is a tax-free municipal-type bond whose interest is fully exempt in the hands of the investor. Which minimum yield on Option Q would make it equal to Option P on an after-tax basis?
Option Q must yield 5.25%. The taxable deposit's after-tax return is 7.5% multiplied by 0.70, which is 5.25%, and because Q's interest is fully exempt, its stated yield equals its after-tax yield.
- A5.25%Correct
- B7.50%
- C10.71%
- D2.25%
Explanation
After-tax yield of P = 7.5% x (1 - 0.30) = 5.25%. Since Q's interest is fully exempt, Q must yield 5.25% to match. 10.71% is the wrong direction (grossing up 7.5%), and 2.25% is the tax amount rather than the net yield.
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