You are examining two different MMMFs. Fund A is tax-exempt and pays 5%. Fund B is taxable and pays 6%. You live in a state that imposes no income taxes and are in a 28% federal tax bracket. At what tax rate would the two funds have identical yields?

Question

Quizplus · Accepted Answer

To find the tax rate where both funds have identical yields, use the formula: Taxable yield * (1 - Tax rate) = Tax-exempt yield. Here, 6% * (1 - Tax rate) = 5%. Solving for the tax rate gives 1 - (5/6) = 0.1667 or 16.67%.

You Are Examining Two Different MMMFs