Explore BrainMass
Share

# Understanding Municipal Bonds

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

What are municipal bonds? We are comparing the equivalent tax-free rate of two investments: 1) A taxable corporate bond that is at a rate of 10%, with a marginal tax of 30%, and 2) A tax-free municipal bond that is at a rate of 8%. Which of the two investments offers a better return considering the tax impact?

#### Solution Preview

Municipal bonds are debt issued by the municipality.

Let us now compare the equivalent tax-free rate of two investments: 1) A ...

#### Solution Summary

Solution compares the taxable corporate bond that is at a rate of 10%, with a marginal tax of 30%, and a tax-free municipal bond that is at a rate of 8%.

\$2.19

## Step-wise answer to PERSONAL FINANCE

1 to 2 pages long
Bernie and Pam Britten are a young married couple beginning careers and establishing a household. They will each make about \$50,000 next year and will have accumulated about \$40,000 to invest. They now rent an apartment but are considering purchasing a condominium for \$100,000. If they do, a down payment of \$10,000 will be required.

They have discussed their situation with Lew McCarthy, an investment advisor and personal friend, and he has recommended the following investments:

*The condominium - expected annual increase in market value = 2%
*Municipal bonds - expected annual yield = 3%.
*High-yield corporate stocks - expected dividend yield = 5%
*Savings account in a commercial bank-expected annual yield = 1%
*High-growth common stocks - expected annual increase in market value = 6%; expected dividend yield = 0.
Calculate the after-tax yields on the foregoing investments, assuming the Brittens have a 28% marginal tax rate (based on Public Law 108-27, The Jobs and Growth Tax Relief Reconciliation Act of 2003).
How would you recommend the Brittens invest their \$40,000? Explain your answer.
Tax planning is just so important! Many people don't understand the way taxes work, and this is an opportunity to learn how to make decisions that are beneficial from a taxation point of view.

SHOW ALL WORK FOR EACH ASSIGNMENT AND EXPLAIN EACH STEP CAREFULLY.

**************************************

1 to 2 pages long

Nancy Tai has recently opened a revolving charge account with MasterCard. Her credit limit is \$1000, but she has not charged that much since opening the account. Nancy hasn't had the time to review her monthly statements as promptly as she should, but over the upcoming weekend, she plans to catch up on her work.

In reviewing November's statement, she notices that her beginning balance was \$600 and that she made a \$200 payment on November 10. She also charged purchases of \$80 on November 5, \$100 on November 15, and \$50 on November 30. She can't tell how much interest she paid in November because she spilled watercolor paint on that portion of the statement. She does remember, though, seeing the letters APR and the number 24%. Also, the back of her statement indicates that interest was charged using the average daily balance method including current purchases, which considers the day of a charge or credit.

Assuming a 30-day period in November, calculate November's interest using the average daily balance method. Also, calculate the interest Nancy would have paid with: a) the previous balance method, b) the adjusted balance method.
Going back in time, when Nancy was just about to open her account, and assuming she could choose among credit sources that offered different monthly balance determinations, and assuming further that Nancy would increase her outstanding balance over time, which credit source would you recommend? Explain.
Credit cards can be your best friend or your worst enemy. Pay attention to the way balances and rates are applied, and take away some good knowledge from this unit. Note that you are asked to calculate THREE different methods of interest...

SHOW ALL WORK FOR EACH ASSIGNMENT AND EXPLAIN EACH STEP CAREFULLY.

View Full Posting Details