Suppose you’re evaluating three alternative MMMF investments. The first fund buy
ID: 2766056 • 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 3.95 percent. The second fund buys only taxable, short-term commercial paper and yields 5.7 percent. The third fund specializes in the municipal debt from the state of New Jersey and yields 3.6 percent. If you are a New Jersey resident, your federal tax bracket is 35 percent, and your state tax bracket is 8 percent.
1. 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.) Aftertax Yield Municipal fund 3.95 % Taxable fund 3.31 % New Jersey municipal fund %
2. Which of these three MMMFs offers you the highest aftertax yield?
New Jersey Fund
Municipal Fund
Taxable Fund
Explanation / Answer
Answer:
1) After tax yield for each alternative will be calculated as;
Municipal Fund : after tax yield = .0395(1-.08) = 3.64
Taxable Fund : after tax yield = .057(1-.35-.08) = 3.25
New jersey municipal fund : after tax yield = 3.6
2) Choose Municipal fund
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