Maria is a wealthy investor who’s looking for a tax shelter. Maria is in the maximum (35%) federal tax bracket and lives in a state with a very high state income tax. (She pays the maximum of 10% in state income tax.) Maria is currently looking at two municipal bonds, both of which are selling at par. One is a AA-rated, in-state bond that carries a coupon of 6%. The other is a AA-rated, out-of-state bond that carries a 7% coupon. Her broker has informed her that comparable fully taxable corporate bonds are currently available with yields of 10%. a. What are the tax-adjusted yields of the two municipal bonds? b. Which one of the three bonds should she buy?
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