3 Jack Jill a married couple filing jointly have a projecte

3. Jack & Jill, a married couple filing jointly, have a projected 2017 taxable income of $300,000. Their neighbor Bob & Betty, also a married couple filing jointly, have a projected 2017 taxable income of $ 66,000. James, a friend to both couples works for a brokerage company specializing in bonds. He asks both couples to consider investing $ 100,000 in either of the following bonds: A municipal bond that pays tax free interest income. 10 year bond paying 6% interest per year, or An AT&T; bond that pays taxable interest income. 10 year bond paying 8% interest per year. Assume each bond has identical risk and other features. A. Which bond would you recommend to Jack & Jill? Why? B. Which bond would you recommend to Bob & Betty? Why.

Solution

Solution A:

Projected taxable income of Jack and Jill = $300,000

As per fedreal tax rate, jack & jill will fall in tax slab of 33%

Therefore if they invest AT&T Bond there after tax return will be = 8% (1-0.33) = 5.36%

If they invest in tax free muncipal bonds there return will be = 6%

Hence Jack and Jill should go for tax free Muncipal bonds.

Solution A:

Projected taxable income of Bob & Betty = $66,000

As per fedreal tax rate, Bob & Betty will fall in tax slab of 15%

Therefore if they invest AT&T Bond there after tax return will be = 8% (1-0.15) = 6.80%

If they invest in tax free muncipal bonds there return will be = 6%

Hence Bob & Betty should go for taxable AT&T Bonds.