Question

Ms. Z has decided to invest $75,000 in state bonds. She could invest in State A bonds paying 5 percent annual interest or in State R bonds paying 5.4 percent annual interest. The bonds have same risk , the interest from both is exempt from federal income tax. Because Ms. Z is a resident of State A , she would not pay State A's 8.5 percent personal income tax on the State A bond interest, but she would pay this tax on the State R bond interest .Ms. Z can deduct any State tax payments in the computations of her federal taxable income , and her federal marginal rate is 33 percent. Should Ms. Z invest in the State A or State R bonds?

Answer 1

Answer:

Ms. Z should invest in the State A.

Explanation:

Coupons from State A = (1 - 0.33)*0.05*75000

                                      = 2512.5

Coupons from State R = (1 - 0.33 - 0.085)*.054*75000

                                     = 2369.25

Therefore, Ms. Z should invest in the State A .