1) Client has asked you to examine given investment alternatives for highest after-tax rate of return under supposition that client is subject to 28% marginal federal income tax and 5% state income tax.
i) Corporate bond with a 7% pretax return
ii) Out-of-state municipal bond with a 5.75% pretax return
iii) In-state municipal bond with a 5.5% pretax return.
2) Your financial planner has just finished the examination of your fixed-income holdings. He has found out each of your after-tax yields, but is cautioning you that tax implications of your holdings could alter if Congress alters marginal tax rates. Based on given after-tax yields, which of these bonds would present greatest after-tax return if your federal marginal tax bracket better from 25% to 30%, as your state marginal bracket remained 4.5%?
i) Corporate bond with a 5.1% after-tax return
ii) Out-of-state municipal bond with a 5.0% after-tax return
iii) In-state municipal bond with a 4.8% after-tax return