Suppose you’re evaluating three alternative MMMF investments. The first fund buy
ID: 2383375 • Letter: S
Question
Suppose you’re evaluating three alternative MMMF investments. The first fund buys a diversified portfolio of municipal securities from across the country and yields 3.2 percent. The second fund buys only taxable, short-term commercial paper and yields 4.9 percent. The third fund specializes in the municipal debt from the state of New Jersey and yields 3.0 percent. If you are a New Jersey resident, your federal tax bracket is 35 percent, and your state tax bracket is 8 percent, which of these three MMMFs offers you the highest aftertax yield?
Explanation / Answer
Solution :
The first fund from a portfolio of municipal securities from across the country yields 3.2 percent . The interest earned on municipal bonds is exempt from federal income taxes
The yield on first fund = (1-0.08) X 0.032
The after tax yield on first fund = 2.944 %
The second fund is subject to federal and state income taxes
The yield on second fund = ( 1-0.35) X ( 1-0.08) X 0.049
The yield on second fund = 0.65X 0.92X 0.049
The yield on second fund = 2.9302%
The yield on third fund = (1-0.08) X 0.03
The yield on third fund = 2.76%
Of these three MMMFs offers , the highest aftertax yield is offered by the first fund with a yield of 2.944 %
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