Mr. Brown is in the 10% federal income tax bracket and wants to invest $8,000 in interest-earning assets. Mr. Black is in the 35% bracket and wants to invest $15,000. The current rate on a typical high-quality tax-exempt municipal bond is 5% and on a similar quality corporate bond is 6.5%. You are the financial advisor to both which investment would you recommend to each.

Mr. Brown is in the 10% federal income tax bracket and wants to invest $8,000 in interest-earning assets. Mr. Black is in the 35% bracket and wants to invest $15,000. The current rate on a typical high-quality tax-exempt municipal bond is 5% and on a similar quality corporate bond is 6.5%. You are the financial advisor to both which investment would you recommend to each.

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter4: Income Exclusions

Section: Chapter Questions

Problem 58P

See similar textbooks

Similar questions

Dennis is currently considering investing in municipal bonds that earn 6 percent interests, or in taxable bonds issued by the Coca-Cola Company that pay 8 Percent. a. If Dennis tax rate is 22 percent, which bond should he choose? Municipal bonds or Taxable Bonds. b. Which bond should he chooise if his tax rate is 32 percent? Municipal bonds or Taxable bonds. c. At what tax rate would he be indifferent between the bonds? Tax rate ? d. What Strategy is this decision based Upon? Development planning strategy, Business planning strategy, Decision planning strategy, Marketing planning strategy, Conversion planning strategy, Timing strategy, Income shifting strategy.
Dana intends to invest $66,000 in either a Treasury bond or a corporate bond. The treasury bond yields 5 percent before tax, and the corporate bond yields 6 percent before tax. Assume Dana's federal marginal rate is 24 percent and she itemizes deductions. a-2. How much interest after-tax would Dana earn by investing in the corporate bond? b-1. If she were to move to another state where her marginal state rate would be 10 percent, which of the two options should she choose? b-2. How much interest after-tax would Dana earn by investing in the corporate bond as per requirement b-1?
Hui is currently considering investing in municipal bonds that earn 8.55 percent interest, or in taxable bonds issued by the Coca-Cola Company that pay 11.40 percent. Required: If Hui's tax rate is 22 percent, which bond should he choose? Which bond should he choose if his tax rate is 32 percent? At what tax rate would he be indifferent between the bonds? What strategy is this decision based upon?
Hui is currently considering investing in municipal bonds that earn 3.64 percent interest, or in taxable bonds issued by the Coca-Cola Company that pay 5.20 percent. Required: a. If Hui's tax rate is 22 percent, which bond should he choose?
Melinda invests $200,000 in a City of Heflin bond that pays 6 percent interest. Alternatively, Melinda could have invested the $200,000 in a bond recently issued by Surething Incorporated that pays 8 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond. Assume Melinda’s marginal tax rate is 25 percent. How much explicit tax would she have paid on the Surething Incorporated bond? What is her after-tax rate of return on the Surething Incorporated bond?
"Ms. Zelda 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 the same risk, and the interest from both is exempt from federal income tax. Because Ms. Zelda is a resident of State A, she wouldn’t 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. Zelda can deduct any state tax payments in the computation of her federal taxable income, and her federal marginal rate is 32 percent. Should Ms. Zelda invest in the State A or the State R bonds?"
Hugh has the choice between investing in s City of Heflin bond at 6 percent or investment in Surething, Inc. bond at 9 percent. Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, in which bond should he invest?
An investor is in a 30% combined federal plus state tax bracket. If corporate bonds offer 8% yields, what yield must municipals offer for the investor to prefer them to corporate bonds?
Dana intends to invest $60,000 in either a Treasury bond or a corporate bond. The Treasury bond yields 5 percent before tax and the corporate bond yields 6 percent before tax. Required: a-1. Assuming Dana’s federal marginal rate is 24 percent and her marginal state rate is 5 percent, which of the two options should she choose? Assume that Dana itemizes deductions. a-2. How much interest after-tax would Dana earn by investing in the corporate bond? Note: Do not round intermediate calculations and round your final answer to the nearest whole dollar amount. b-1. If she were to move to another state where her marginal state rate would be 10 percent, which of the two options should she choose? Assume that Dana itemizes deductions. b-2. How much interest after-tax would Dana earn by investing in the corporate bond as per requirement b-1? Note: Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.
Melinda invests $200,000 in a City of Heflin bond that pays 6 percent interest. Alternatively, Melinda could have invested the $200,000 in a bond recently issued by Surething Inc. that pays 8 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond. Assume Melinda's marginal tax rate is 25 percent. a) What is her after-tax rate of return for the City of Heflin bond? b) How much explicit tax does Melinda pay on the City of Heflin bond? c) How much implicit tax does she pay on the City Heflin bond? d) How much explicit tax would she have paid on the Surething, Inc. bond? e) What is her after-tax rate of return on the Surething Inc. bond?
An investor is trying to decide between a muni paying 6.20 percent or an equivalent taxable corporate paying 8.25 percent. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond? Group of answer choices 20.0 percent 66.7 percent 80.0 percent 25.0 percent 75.0 percent
Otis is the CEO of Rectify, Inc., a private foundation. Otis invests $500,000 (80%) of the foundation’s investment portfolio in high-risk derivatives. Previously, the $500,000 had been invested in corporate bonds with an AA rating that earned 4% per annum. If the derivatives investment works as Otis’s investment adviser claims, the annual earnings could be as high as 20%. a. Determine whether Rectify is subject to any of the taxes imposed on private foundations. b. If so, calculate the amount of the initial tax.