Essay: Investment and After Tax Yields

Sample Essay

Bernie and Pam Britten rent an apartment and will make $50,000 each next year and will save $40,000 which they plan to invest. They are not sure where to invest these savings and have several options available. They can purchase a condominium with a down payment of $10,000, invest in high-yield corporate stocks, municipal bonds, high growth common stocks or deposit this amount in a savings account. The following sections cover the calculation of yields and recommendations based on these calculations.

Taxes have to be paid on earnings from all investments except Municipal bonds which are tax exempt (Mishkin & Eakins, 2006). Marginal tax rate for the couple is 28% which is applicable on all investments except municipal bonds. The expected increase in market value of the condominium is 2% per annum but this is not the yield on investment as the couple plan to live in the condominium but the increase will be taken into account when making recommendations. As municipal bonds are exempt from federal taxes the after tax will be equal to the pretax yield which is 3%. High growth common stocks do not have a dividend yield and an expected increase in market value by 6% which will also be considered when making recommendations.

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