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 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?

QUESTION BELOW

In the previous problem, which MMMF offers you the highest yield if you are a resident of Texas, which has no state income tax?

Explanation / Answer

Plan1 diversified portfolio of municipal securities from across the country and yields 3.2 percent State tax of 8% 2.94 Plan2 short-term commercial paper and yields 4.9 percentFederal tax 35% state tax 8 total 43% =4.9*.57 Taxable 2.79 Plan3 municipal debt from the state of New Jersey and yields 3.0 percent Not Taxable 3.00 Plan 3 give higher yield In the previous problem, which MMMF offers you the highest yield if you are a resident of Texas, which has no state income tax? Plan 2   After tax yield 3.185 % percent give higher yield

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