Suppose you’re evaluating three alternative MMMF investments. The first fund buy

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 2.8 percent. The second fund buys only taxable, short-term commercial paper and yields 5.1 percent. The third fund specializes in the municipal debt from the state of New Jersey and yields 2.5 percent. If you are a New Jersey resident, your federal tax bracket is 35 percent, and your state tax bracket is 8 percent.

Calculate the aftertax yield for each of the alternatives. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Suppose you’re evaluating three alternative MMMF investments. The first fund buys a diversified portfolio of municipal securities from across the country and yields 2.8 percent. The second fund buys only taxable, short-term commercial paper and yields 5.1 percent. The third fund specializes in the municipal debt from the state of New Jersey and yields 2.5 percent. If you are a New Jersey resident, your federal tax bracket is 35 percent, and your state tax bracket is 8 percent.

Explanation / Answer

Answer:

1. After Tax Yield:

Municiple Fund = 0.028(1-0.08) = 0.02576 = 2.58%
Taxable fund = 0.051(1-0.35-0.08) = 2.91%

New Jersey fund = 2.5%

2. Choose TAxable fund !!

Because of HIgher after tax yield

Thanks

Thanks

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