In class, we discussed the differential tax rates among areas and taxpayers with respect to the implicit and explicit tax rates. This exercise is an opportunity for you to examine this theory in the real world. Hence, you are requested to select a taxable bond fund and compare it to two or three municipal bond funds that are state specific. Hence, there are three $($or four$)$ funds in total that are analyzed by you $($one corporate bond fund, two municipal bond funds$).$ The objective here is to see if a person can arbitrage a profit by selectively investing in another state$$s municipal fund. One muni fund may be your state of residence and the other might be a state with a zero$-$income tax rate. You might include a fourth state with a state income tax rate that is significantly higher than your state of residence$$s state income tax rate.

For a given point in time, you are expected to determine if$,$ and if so$,$ to what extent, a wealth advantage exists for our base taxpayer $($presumably you$).$ This is not an easy task since you need to consider several variables. For example, there are different

$$ Federal income tax brackets $($you might select the highest rate and your own marginal tax rate$),$

$$ State income tax brackets $($dependent on the states chosen by you $($note$,$ you can only choose one state with no state income tax $($i$.$e$.,$ a zero$-$tax rate$))),$

$$ Risk of bond fund $($should be nearly equal or adjusted to approximate equality$),$

$$ Standard deduction $($although itemization would be a reasonable assumption for a small population of our country, you can ignore this issue unless you want to analyze it and simply assume you elect the standard deduction$).$

Be sure to document your sources.