Suppose you’re evaluating three alternative MMMF investments. The first fund buys a diversified portfolio of municipal securities from across the country and yields 4.4 percent. The second fund buys only taxable, short-term commercial paper and yields 5.9 percent. The third fund specializes in the municipal debt from the state of New Jersey and yields 4.1 percent. You are a New Jersey resident, your federal tax bracket is 35 percent, and your state tax bracket is 8 percent. (Assume your state taxes do not affect your federal taxable income.)
1. Calculate the after-tax yield for each of the alternatives. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)
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2. Which of these three MMMFs offers you the highest after-tax yield?
Taxable Fund
New Jersey Fund
Municipal Fund
1.
after tax yield | |
municipal fund | 4.05% |
Taxable fund | 3.36% |
new jersey municipal fund | 4.10% |
2.New jersey fund
New jersey fund offers the highest after tax return.
working:
municipal fund is affected only by state taxes = 4.4% *(1-0.08)=>4.05%.
taxable fund is affected by both state and federal taxes = 5.9%*(1-0.35-0.08)=>3.36%.
new jersey fund is not affected by taxes for New Jersey resident.
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