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Ms. Drake is deciding between investing $50,000 in two different municipal bonds, both of which...

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Accounting

  1. Ms. Drake is deciding between investing $50,000 in two different municipal bonds, both of which have the same risk. The first option is state of Colorado bonds paying interest of 3.35%. The second option is state of Texas bonds paying interest of 3.50%. All income from either bond investment is nontaxable at the federal level.

    Because Ms. Drake is a resident of Colorado, any income from the Colorado bond is nontaxable at the state level as well. However, any income from the Texas bond would be taxable in Colorado at Ms. Drakes state tax rate of 4.63%. Additionally, any state income taxes paid to Colorado on the Texas bond income would be deductible on Ms. Drakes federal tax return, benefiting her at her federal tax rate of 35%.

    Considering all of the above facts, which bond investment offers Ms. Drake the greater post-tax return and by how much? Support your answer with clearly labeled calculations.

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