Q1: Montana Tax Free bonds (20 points)

1. You buy a Montana Tax Free bond that offers 5.75% annual return. Your marginal Federal tax rate is 25% and Montana state tax rate is 6.9%. Find out the tax-equivalent return.

A. Federal tax rate
B. Montana state tax rate
C. Add A & B: Combined tax rate
D. Subtract C from 100%
E. Divide bond return by D: tax-equivalent return

3. You buy a Montana Tax Free bond that offers 6.25% annual return. Your marginal Federal tax rate is 28% and Montana state tax rate is 6.9%. Find out the tax-equivalent return. Use the above format in (A) to find tax-equivalent return. Also show E.