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 $60,000 in bonds. You have the choice of investing in tax-exempt municipal bonds yielding 2.75% or corporate bonds yielding 4% 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 32% marginal tax bracket for federal income taxes and your state and local taxes on that income amount to an additional 5%, what is the after-tax income (in $) on the corporate bonds? $
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 $60,000 in bonds. You have the choice of investing in tax-exempt municipal bonds yielding 2.75% or corporate bonds yielding 4% 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 32% marginal tax bracket for federal income taxes and your state and local taxes on that income amount to an additional 5%, what is the after-tax income (in $) on the corporate bonds? $
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 $60,000 in bonds. You have the choice of investing in tax-exempt municipal bonds yielding 2.75% or corporate bonds yielding 4% 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 32% marginal tax bracket for federal income taxes and your state and local taxes on that income amount to an additional 5%, 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?
%
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