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problem: Suppose you have two short term risk free investment choices. 1st is a one year zero coupon Treasury bill, which you can buy today at $950 for each 1000 dollar at maturity. The 2nd is a one year CD which offers a 5% yearly rate, compounded semiannually. Investor is subject to a 35 percent federal tax and 8 percent state tax. Federal and state taxes will be paid on CD but only federal will be paid on Treasury bill & it will be paid when it is received, thus at maturity date.

Demonstrate [A] returns of cash and [B] which is the best choice?

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