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:

Mispricing

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Statistical Analysis

The process of collecting, exploring, and presenting large amounts of data to discover underlying patterns and trends.

Salary Cap

A limit on the amount of money that a sports team can spend on player salaries, usually imposed by the league to maintain competitive balance.

Stock-price Response

The reaction of a company's stock price to financial news, market events, or unanticipated occurrences affecting the business.