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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Comparison of Products Across Categories

Caselet: Ms. Rao is in the 30% tax bracket (ignore cess). She compares a taxable bond paying 8.0% annually with a tax-free bond paying 5.6% annually. Assuming interest on the taxable bond is fully taxed at her slab rate, which option is correct?

The taxable bond's post-tax yield is 8.0% multiplied by 0.70, which is 5.6%. That equals the tax-free bond's 5.6%, so Ms. Rao would be indifferent between them on a post-tax basis at a 30% slab rate.

  1. ATaxable bond post-tax yield is 5.6%, equal to the tax-free bondCorrect
  2. BTaxable bond post-tax yield is 4.8%, lower than the tax-free bond
  3. CTaxable bond post-tax yield is 2.4%, lower than the tax-free bond
  4. DTaxable bond post-tax yield is 6.4%, higher than the tax-free bond

Explanation

Post-tax yield = 8.0% x (1 - 0.30) = 5.6%. This equals the tax-free bond yield, so she is indifferent. Taking 8.0% less 30% of 8 as 4.8 mistakenly subtracts 3.2 twice; 2.4 is only the tax amount.

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