The municipal bond fund is tax deductible

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A retired couple has received a gift of $5,000, which they would like to use to buy shares in a mutual fund. They are in the 30% bracket for federal income tax, and they pay 5% state and 1% local income taxes. Should they purchase shares in a tax-free municipal bond fund that pays 4% annual interest or a high-quality corporate bond fund that pays 6% interest? Both funds are highly recommended, and both have had similar fluctuations in price; the only difference between them is that the interest from the municipal bond fund is tax deductible, whereas the higher interest from the corporate bond fund is not.

Reference no: EM131974260

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