Problem
Alexandra was considering purchasing an interest in a tax-exempt bond fund for $100,000 when she discovered that the interest must be included on her state income tax return. The interest rate is 5%. Her marginal federal tax rate is 35%, and her marginal state income tax rate is 10%. Alexandra itemizes her deductions on her federal income tax return. As an alternative, Alexandra can purchase a state bond (a double-exempt bond) yielding 4.9% interest that is exempt from both federal and state income tax. Which investment would yield the greater after-tax return?