You are examining two different MMMFs.Fund A is tax-exempt and pays 7%.Fund B is taxable and pays 9.5%.You live in a state that imposes no income taxes and you are in the 25% federal tax bracket.Which of these two alternatives is better?

Question

Quizplus · Accepted Answer

Even though Fund A is tax-exempt, its yield after taxes would be (1-0.25) x 7% = 5.25%. On the other hand, Fund B, which is taxable, would have an after-tax yield of (1-0.25) x 9.5% = 7.13%. Therefore, Fund B is the better choice despite being taxable due to its higher after-tax yield.

You Are Examining Two Different MMMFs