Question
Maria Lopez is a wealthy investor who's looking for a tax shelter. Maria is in the maximum (35%) federal tax bracket and lives in a
Maria Lopez is a wealthy investor who's looking for a tax shelter. Maria is in the maximum (35%) federal tax bracket and lives in a state with a very high state income tax. (She pays the maximum of 11.5% in state income tax.) Maria is currently looking at two municipal bonds, both of which are selling at par. One is a AA-rated in-state bond that carries a coupon of
6.375%.
The other is a AA-rated out-of-state bond that carries a coupon of
7.125%.
Her broker has informed her that comparable fully taxable corporate bonds are currently available with yields of
9.750%.
Alternatively, long Treasuries are now available at yields of
9.000%.
She has $100,000 to invest, and because all the bonds arehigh-quality issues, she wants to select the one that will give her maximum after-tax returns.
a. Which one of the 4 bonds should she buy?
1. the taxable equivalent yield for all 4
b. Rank the 4 bonds (from best to worst) in terms of their taxable equivalent yields.
please show work I want to understand how you got it!
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