Juan was considering purchasing an interest in a tax-exempt bond fund for $100,000 when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is
35%, and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative, Juan can purchase a state bond (a double-exempt bond) yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

Question

Quizplus · Accepted Answer

The Answer of Juan was considering purchasing an interest in a tax-exempt bond fund for $100,000 when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is
35%, and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative, Juan can purchase a state bond (a double-exempt bond) yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

Juan Was Considering Purchasing an Interest in a Tax-Exempt Bond