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Imagine the case of two investors: A and B. Both are residentsof Philadelphia. Investor A...

Imagine the case of two investors: A and B. Both are residents of Philadelphia. Investor A in a 20%tax bracket and B in a 30 % tax bracket. Suppose that short-term Pennsylvania Municipal Bond currently offers yields of 5%. Other things remaining the same, which investor is likely to receive more benefits from this bond?

A.Investor A

B.Investor A and B equally prefer this bond

C.Investor B

D.Sufficient information is not provided to answer this question

Solutions

Expert Solution

Correct answer is B. Investor A and B equally prefer this bond.

As the municipal bond is exempted for tax for state and federal taxes for the residents of the state which is issuing bonds. Income from municipal bonds are exempted from taxes in Pennsylvania, so it does not matter that the investor is of which tax bracket, both will prefer the bond equally (as income from bond is exempted).

jeff jeffy answered 2 years ago
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