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 3.5 percent. The second fund buys only taxable, short-term commercial paper and yields 5.5 percent. The third fund specializes in the municipal debt from the state of New Jersey and yields 3.2 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 % Taxable fund % New Jersey municipal fund %

Explanation / Answer

After-tax Yield Municipal fund 0.035(1 – 0.08) = 3.22 Taxable fund 0.055(1 – 0.35 – 0.08) = 3.14 New Jersey municipal fund = 3.20

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