Suppose you're evaluating three alternative MMMF investments. The first fund buys a diversified portfolio of municipal securities from across the country and yields 3.85 percent.
The second fund buys only taxable, short-term commercial paper and yields 5.6 percent.
The third fund specializes in the municipal debt from the state of New Jersey and yields 3.5 percent.
If you are a New Jersey resident, your federal tax bracket is 35 percent, and your state tax bracket is 8 percent.
1. Calculate the aftertax yield for each of the alternatives.
After Tax Yield
Municipal fund % 3.542
Taxable fund %
New Jersey municipal fund %
2. Which of these three MMMFs offers you the highest aftertax yield?
Municipal Fund (should be this )
New Jersey Fund
Taxable Fund