Juan Was Considering Purchasing an Interest in a Tax-Exempt Bond

question 29

Essay

Juan was considering purchasing an interest in a tax-exempt bond fund for $100,000 when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is
35%, and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative, Juan can purchase a state bond (a double-exempt bond) yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

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Definitions:

American Revolution

A historic conflict between Great Britain and its Thirteen Colonies in North America that resulted in the independence of the United States.

Early 20th Century

A historical period that extends from the year 1901 to 1940, marking the beginning phase of the 20th century.

1960s

A decade characterized by significant cultural, social, and political changes around the world.

Coercive Power

Power that is derived from the ability to punish or penalize others, often used as a means to achieve compliance or control.