A taxable money market mutual fund has a return of 3.8 percent. If you are in a 34 percent tax bracket, what interest rate would you require on a non-taxable income trust to be equally well-off?

Question

Quizplus · Accepted Answer

To solve this problem, we need to use the after-tax equivalent yield formula:

After-tax equivalent yield = Taxable yield / (1 - Marginal tax rate)

Plugging in the given values:

After-tax equivalent yield = 3.8% / (1 - 0.34) = 5.76%

This means that to be equally well-off, you would need a non-taxable income trust with a yield of 5.76%.

The only option that is higher than 5.76% is choice B, which is 2.51% or higher. Therefore, the answer is B.

A Taxable Money Market Mutual Fund Has a Return of 3.8