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 4.3 percent. The second fund buys only taxable, short-term commercial paper and yields 5.8 percent. The third fund specializes in the municipal debt from the state of New Jersey and yields 3.8 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 sum of after-tax percentage yield of the three alternatives. (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

1. Municipal Bonds After tax return = 4.30% because it is tax exmpted

2. Short term commercial paper is taxable under state and federal system thus

Short term commercial paper after tax return = 5.80% * (1 - 0.38 - 0.08)

Short term commercial paper after tax return = 3.13%

3. For new jersey municipal debt only federal taxes are applicable

New Jersey municipal debt after tax return = 3.80% * (1 - 0.38)

new jersey municipal debt after tax return = 2.36%

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