Question: Ms Z has decided to invest 75 000 in state bonds
Ms. Z has decided to invest $75,000 in state bonds. She could invest in State A bonds paying 5 percent annual interest or in State R bonds paying 5.4 percent annual inter-est. The bonds have the same risk, and the interest from both is exempt from federal income tax. Because Ms. Z is a resident of State A, she wouldn’t pay State A’s 8.5 per-cent personal income tax on the State A bond interest, but she would pay this tax on the State R bond interest. Ms. Z can deduct any state tax payments in the computation of her federal taxable income, and her federal marginal rate is 33 percent. Should Ms. Z invest in the State A or the State R bonds?
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