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Suppose youre evaluating three alternative MMMF investments. The first fund buys a diversified portfolio of municipal securities from across the country and yields 3.4 percent.

Suppose youre evaluating three alternative MMMF investments. The first fund buys a diversified portfolio of municipal securities from across the country and yields 3.4 percent. The second fund buys only taxable, short-term commercial paper and yields 5.4 percent. The third fund specializes in the municipal debt from the state of New Jersey and yields 3.1 percent. You are a New Jersey resident, your federal tax bracket is 35 percent, and your state tax bracket is 8 percent. (Assume your state taxes do not affect your federal taxable income.)

a. 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.)

Aftertax Yield
Municipal Fund 3.10 %
Taxable Fund %
New Jersey Municipal Fund

b. Which of these three MMMFs offers you the highest aftertax yield?

multiple choice

  • New Jersey Fund

  • Municipal Fund

  • Taxable Fund

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