Question

More than 50,000 state and local governments and their agencies borrow money by issuing municipal bonds to build, repair, or improve schools, streets, highways, hospitals, sewer systems, and so on. When the federal income tax law was adopted in 1913, interest on municipal bonds was excluded from federal taxation. As a result, municipal bond investors are willing to accept lower yields than those they can obtain from taxable bonds. As part of your portfolio, you are considering investing $90,000 in bonds. You have the choice of investing in tax-exempt municipal bonds yielding 3.75% or corporate bonds yielding 5% in taxable interest income. A) What is the annual interest income (in $) and tax status of the municipal bond investment? B) What is the annual interest income (in $) and tax status of the corporate bond investment? C) If you are in the 30% marginal tax bracket for federal income taxes and your state and local taxes on that income amount to an additional 7%, what is the after-tax income (in $) on the corporate bonds? D) What is the actual percent yield realized on the corporate bonds after taxes?

          More than 50,000 state and local governments and their agencies
borrow money by issuing municipal bonds to build, repair,
or improve schools, streets, highways, hospitals, sewer systems,
and so on. When the federal income tax law was adopted in 1913,
interest on municipal bonds was excluded from federal taxation. As
a result, municipal bond investors are willing to accept lower
yields than those they can obtain from taxable bonds.
As part of your portfolio, you are considering investing $90,000
in bonds. You have the choice of investing in tax-exempt municipal
bonds yielding 3.75% or corporate bonds yielding 5% in taxable
interest income.
A) What is the annual interest income (in $) and tax status of
the municipal bond investment?
B) What is the annual interest income (in $) and tax status of
the corporate bond investment?
C) If you are in the 30% marginal tax bracket for federal income
taxes and your state and local taxes on that income amount to an
additional 7%, what is the after-tax income (in $) on the corporate
bonds?
D) What is the actual percent yield realized on the corporate
bonds after taxes?

Added by Sarah P.

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