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AWMA practice questions

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Question 1Wealth Management

A client's portfolio holds 60% equities and 40% bonds. The client's investment policy statement sets a strategic equity range of 50% to 70%. Which term best describes the 60/40 split itself?

  1. The tactical allocation
  2. The risk budget
  3. The strategic asset allocation Correct answer.
  4. The rebalancing corridor

Explanation

The strategic asset allocation is the long-term target mix chosen to match the client's goals, risk tolerance, and time horizon. Tactical shifts are short-term deviations from that target, and the corridor is the permitted band around it.

Question 2Wealth Management

Which measure of risk-adjusted return divides excess return by the standard deviation of the portfolio's returns?

  1. Sharpe ratio Correct answer.
  2. Treynor ratio
  3. Information ratio
  4. Jensen's alpha

Explanation

The Sharpe ratio uses total volatility, measured by standard deviation, as the denominator of risk-adjusted excess return. Treynor instead uses beta, and the information ratio uses tracking error against a benchmark.

Question 3Wealth Management

Under the Uniform Principal and Income Act as commonly adopted, which item is generally allocated to income rather than principal?

  1. Cash dividends received on trust-held stock Correct answer.
  2. Proceeds from the sale of trust real estate
  3. A stock dividend paid in additional shares
  4. A gain realized on the sale of a bond

Explanation

Ordinary cash dividends are treated as income payable to the income beneficiary under typical principal-and-income rules. Stock dividends, capital gains, and sale proceeds are generally allocated to principal to preserve the corpus.

Question 4Wealth Management

An investor in the 35% federal marginal bracket holds a municipal bond yielding 3.4%. What is the approximate tax-equivalent yield?

  1. 4.59%
  2. 2.21%
  3. 9.71%
  4. 5.23% Correct answer.

Explanation

Tax-equivalent yield equals the municipal yield divided by one minus the marginal tax rate, so 3.4% / (1 − 0.35) = 3.4% / 0.65 ≈ 5.23%. This lets the investor compare the muni with a taxable bond on an after-tax basis.

Question 5Wealth Management

A client wants to gift $19,000 to each of four grandchildren in a single year. Assuming the annual gift tax exclusion is $19,000 and no gift-splitting, what is the total amount that avoids using lifetime exemption?

  1. $19,000
  2. $152,000
  3. $38,000
  4. $76,000 Correct answer.

Explanation

Each donee may receive up to the annual exclusion from each donor without consuming lifetime exemption. Four grandchildren multiplied by $19,000 equals $76,000 of exclusion-eligible gifts.

Question 6Wealth Management

A retiree's portfolio is expected to earn 6% annually, and inflation is expected to be 2.5%. What is the approximate real return using the precise (geometric) relationship?

  1. 3.41% Correct answer.
  2. 2.34%
  3. 3.5%
  4. 8.5%

Explanation

The precise real return is (1 + nominal) / (1 + inflation) − 1, which equals 1.06 / 1.025 − 1 ≈ 3.41%. The simple subtraction of 3.5% is only an approximation that slightly overstates purchasing-power growth.

Question 7Wealth Management

Which document typically grants an agent authority to make investment and financial decisions on a client's behalf if the client becomes incapacitated?

  1. A living will
  2. A durable power of attorney Correct answer.
  3. A letter of last instruction
  4. A beneficiary designation form

Explanation

A durable power of attorney survives the principal's incapacity and authorizes the agent to act on financial matters. A living will addresses medical wishes, and beneficiary designations control asset transfers at death.

Question 8Wealth Management

A bond with a modified duration of 6.5 is expected to lose approximately what percentage of value if interest rates rise by 100 basis points?

  1. 0.65%
  2. 65%
  3. 6.5% Correct answer.
  4. 13%

Explanation

For small rate changes, percentage price change approximates negative duration times the change in yield. A 1% rise with duration of 6.5 implies a price decline of about 6.5%, before convexity adjustment.

Question 9Wealth Management

An investment adviser receives a fee based on the capital gains realized in a client's account. Under the Advisers Act, this arrangement is:

  1. Prohibited in all circumstances
  2. Permitted if the fee is disclosed and the client consents in writing Correct answer.
  3. Permitted only if the client is a qualified purchaser
  4. Permitted only for accounts above $1 million

Explanation

Performance-based compensation tied to capital gains is allowed only when the arrangement is disclosed and the client provides informed written consent, among other conditions. It is not banned outright nor limited to a dollar threshold.

Question 10Wealth Management

A client's $2,000,000 estate is left entirely to a surviving spouse who is a U.S. citizen. What is the federal estate tax consequence at the first death?

  1. Only half the estate is taxable
  2. No estate tax is due because of the unlimited marital deduction Correct answer.
  3. The full estate is taxable immediately
  4. Estate tax is deferred but the exemption is consumed

Explanation

The unlimited marital deduction allows an unlimited amount to pass to a surviving spouse who is a U.S. citizen free of federal estate tax at the first death. The assets may then be included in the survivor's estate later.

Question 11Wealth Management

A 62-year-old client wants to begin Social Security benefits early while continuing to work full time. Which effect is most accurate?

  1. Benefits increase because payroll taxes continue to be paid
  2. Benefits are reduced for early claiming and may be further reduced by the earnings test Correct answer.
  3. Benefits are unaffected by earnings once the client reaches age 62
  4. Benefits are suspended entirely for any month the client works

Explanation

Claiming before full retirement age permanently reduces the benefit, and the retirement earnings test may temporarily withhold benefits when wages exceed the annual limit. Both effects can apply simultaneously.

Question 12Wealth Management

A portfolio returned 11% with a standard deviation of 14%. The risk-free rate is 3%. What is the Sharpe ratio?

  1. 0.79
  2. 1.14
  3. 0.29
  4. 0.57 Correct answer.

Explanation

The Sharpe ratio equals (return − risk-free rate) / standard deviation, so (11% − 3%) / 14% = 8/14 ≈ 0.57. It expresses excess return earned per unit of total volatility.

Question 13Wealth Management

An investor buys a stock at $40 and sells it one year later at $46 after receiving $1 in dividends. What is the total holding period return?

  1. 12.5%
  2. 2.5%
  3. 15.0%
  4. 17.5% Correct answer.

Explanation

Holding period return includes both price appreciation and income: ($46 − $40 + $1) / $40 = $7 / $40 = 17.5%. Ignoring the dividend would understate the true total return.

Question 14Wealth Management

Which characteristic most distinguishes a Roth IRA from a traditional IRA for a client expecting higher future tax rates?

  1. Roth accounts require minimum distributions during the owner's lifetime
  2. Roth qualified withdrawals are tax-free Correct answer.
  3. Roth accounts have no contribution limits
  4. Roth contributions are always deductible

Explanation

Roth contributions are made with after-tax dollars, and qualified withdrawals are tax-free, which benefits clients who expect higher rates later. Traditional IRA contributions may be deductible but withdrawals are taxed as ordinary income.

Question 15Wealth Management

A client holds a large, concentrated position in a single stock with a very low cost basis. Which strategy defers capital gains while providing diversification and cash flow?

  1. A charitable remainder trust Correct answer.
  2. Outright sale of the shares
  3. A short sale against the box
  4. A margin loan secured by the shares

Explanation

A charitable remainder trust can sell the appreciated stock without immediate taxation to the donor, diversify the proceeds, and pay an income stream to the client. An outright sale triggers gain, and a margin loan provides cash but not diversification.

Question 16Wealth Management

An adviser recommends a mutual fund share class that pays the adviser a trailing 12b-1 fee. Which standard requires the adviser to disclose this conflict?

  1. The prudent investor rule
  2. The suitability standard of FINRA
  3. The best execution obligation
  4. The fiduciary duty of loyalty Correct answer.

Explanation

The duty of loyalty requires advisers to disclose conflicts of interest, including compensation that creates an incentive to recommend particular products. The prudent investor rule governs care in managing investments rather than conflict disclosure.

Question 17Wealth Management

A client wants a guaranteed lifetime income stream beginning immediately, funded with a lump sum, with payments continuing to a beneficiary if the client dies early. Which product best fits?

  1. An immediate annuity with a life-with-period-certain payout Correct answer.
  2. A fixed indexed annuity with a 10-year surrender schedule
  3. A target-date mutual fund
  4. A deferred variable annuity

Explanation

An immediate annuity converts a lump sum into payments that start right away, and a life-with-period-certain payout guarantees payments for life plus a minimum number of years to a beneficiary. Deferred annuities accumulate first and do not start income immediately.

Question 18Wealth Management

Which statement best describes the role of a beneficiary designation on a 401(k) account?

  1. It is overridden by the account owner's will
  2. It has no effect if a spouse survives the owner
  3. It applies only if the estate is the named beneficiary
  4. It generally controls distribution of the account at death Correct answer.

Explanation

Beneficiary designations on retirement accounts typically govern who receives the assets at death, regardless of what a will says. The will controls only assets that pass through probate without a designation.

Question 19Wealth Management

A client's marginal federal rate is 32% and state rate is 5%. A corporate bond yields 6%. What is the approximate after-tax yield?

  1. 3.78% Correct answer.
  2. 5.70%
  3. 4.08%
  4. 4.62%

Explanation

The combined marginal rate is 37%, so the after-tax yield is 6% × (1 − 0.37) = 6% × 0.63 ≈ 3.78%. This figure allows comparison with tax-exempt alternatives.

Question 20Wealth Management

A 70-year-old client with a $1,000,000 traditional IRA must take required minimum distributions. Which factor most directly determines the annual RMD amount?

  1. The account's year-to-date performance
  2. The number of named beneficiaries
  3. The prior year-end balance divided by a life expectancy factor Correct answer.
  4. The client's marginal tax bracket

Explanation

The RMD is calculated by dividing the prior December 31 account balance by the applicable life expectancy factor from IRS tables. Market performance during the year and the tax bracket do not set the required amount.

Question 21Wealth Management

An investor holds a convertible bond trading at a conversion premium. If the underlying stock rises sharply, which behavior is most likely?

  1. The bond will trade primarily on its investment value
  2. The bond will begin to trade more like the underlying equity Correct answer.
  3. The conversion premium will widen indefinitely
  4. The bond's coupon will reset upward

Explanation

As the stock price rises well above the conversion price, the convertible's value is driven mainly by the equity conversion value, so it behaves more like stock. Its investment value becomes a distant floor, and the premium typically narrows.

Question 22Wealth Management

Which approach best manages sequence-of-returns risk for a client entering retirement?

  1. Withdrawing a fixed percentage of the initial portfolio regardless of markets
  2. Maintaining a cash and short-term bond reserve to fund near-term withdrawals Correct answer.
  3. Investing entirely in long-duration government bonds
  4. Holding 100% equities to maximize expected return

Explanation

A reserve of cash and short-term bonds lets a retiree fund withdrawals without selling equities during a downturn, mitigating sequence risk. This buffer protects against the harm of liquidating growth assets at depressed prices.

Question 23Wealth Management

A client wants to fund a grandchild's education in 15 years and is uncomfortable with volatility. Which vehicle offers tax-free growth when used for qualified education expenses?

  1. A 529 plan Correct answer.
  2. A taxable brokerage account
  3. A traditional IRA
  4. A health savings account

Explanation

A 529 plan grows tax-deferred and permits tax-free withdrawals for qualified education expenses, making it well suited to a 15-year education goal. A taxable account offers no such exclusion, and an HSA is for medical costs.

Question 24Wealth Management

A trustee must invest trust assets prudently under the Uniform Prudent Investor Act. Which practice best reflects the Act's modern portfolio approach?

  1. Avoiding all assets with any volatility
  2. Assessing risk and return at the total portfolio level Correct answer.
  3. Favoring assets that generate the highest current income
  4. Evaluating each holding in isolation for risk

Explanation

The Uniform Prudent Investor Act adopts a total-portfolio approach, judging each investment in the context of the whole portfolio rather than in isolation. Diversification and risk-return tradeoffs are assessed collectively.

Question 25Wealth Management

A client earns $150,000 and contributes the maximum to a health savings account. Which statement about HSA contributions is correct?

  1. Contributions are tax-deductible but growth is taxed annually
  2. Contributions are permitted only after age 65
  3. Contributions are tax-deductible, growth is tax-free, and qualified medical withdrawals are tax-free Correct answer.
  4. Contributions are made with after-tax dollars and withdrawals are always taxable

Explanation

An HSA offers a triple tax advantage: deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. This makes it a powerful savings vehicle when paired with a high-deductible health plan.

Question 26Wealth Management

Which federal agency administers the securities laws governing investment advisers, including the registration of larger advisers?

  1. The Securities and Exchange Commission Correct answer.
  2. The Federal Deposit Insurance Corporation
  3. The Financial Industry Regulatory Authority
  4. The Consumer Financial Protection Bureau

Explanation

The SEC administers the Investment Advisers Act of 1940 and oversees federally registered advisers, generally those with at least $100 million in assets under management. FINRA is a self-regulatory organization for broker-dealers, not the federal regulator of advisers.

Question 27Wealth Management

A client with a 30-year horizon wants the highest expected long-run return and can tolerate large interim declines. Which asset allocation is most consistent with that objective?

  1. A portfolio split evenly between cash and municipal bonds
  2. A portfolio of laddered certificates of deposit
  3. A portfolio weighted heavily toward short-term Treasuries
  4. A portfolio weighted heavily toward equities Correct answer.

Explanation

Equities have historically offered the highest expected return among major asset classes, and a long horizon with high risk tolerance supports a heavy equity weighting. The other allocations emphasize capital preservation and offer lower expected returns over long periods.

Question 28Wealth Management

Under the Investment Company Act of 1940, which term describes a fund that continuously offers redeemable shares and stands ready to buy them back at net asset value?

  1. An open-end fund Correct answer.
  2. A closed-end fund
  3. A unit investment trust
  4. A hedge fund

Explanation

Open-end funds continuously issue redeemable shares and repurchase them at net asset value on request, which is the defining feature of a mutual fund. Closed-end funds issue a fixed number of shares that then trade on an exchange.

Question 29Wealth Management

A client in the 24% federal bracket holds a municipal bond yielding 3.2%. What is the approximate tax-equivalent yield compared with a taxable bond?

  1. 3.20%
  2. 2.43%
  3. 5.15%
  4. 4.21% Correct answer.

Explanation

The tax-equivalent yield equals the municipal yield divided by one minus the marginal tax rate, or 3.2% divided by 0.76, which is about 4.21%. A taxable bond must yield more than that to deliver the same after-tax result.

Question 30Wealth Management

Which document sets out a client's goals, time horizon, risk tolerance, and constraints and forms the foundation for an investment recommendation?

  1. The trade confirmation
  2. The annual report
  3. The investment policy statement Correct answer.
  4. The prospectus

Explanation

An investment policy statement records objectives, time horizon, risk tolerance, and constraints, and it guides ongoing portfolio decisions. It is the governing document advisers reference when markets or client circumstances change.

Question 31Wealth Management

A client receives $50,000 from an inheritance and wants the funds available for a home purchase in eight months. Which vehicle best matches that liquidity need?

  1. A short-term Treasury bill or money market fund Correct answer.
  2. A 20-year corporate bond
  3. A small-cap growth mutual fund
  4. A 10-year Treasury note

Explanation

Funds needed within a year should be held in vehicles with minimal price risk and high liquidity, such as Treasury bills or money market funds. Longer-duration and equity holdings can lose principal if sold at an inopportune time.

Question 32Wealth Management

Which type of insurance is designed primarily to replace income and cover obligations when a breadwinner dies prematurely?

  1. Term life insurance Correct answer.
  2. Disability income insurance
  3. Umbrella liability insurance
  4. Long-term care insurance

Explanation

Term life insurance provides a death benefit for a defined period and is the standard tool for replacing income lost when a breadwinner dies. Disability income insurance replaces earnings lost to illness or injury while the insured is still alive.

Question 33Wealth Management

Which statement accurately describes the standard deduction's role in individual income tax planning?

  1. It is a credit subtracted directly from the tax owed
  2. It reduces taxable income by a fixed amount that varies with filing status Correct answer.
  3. It phases out entirely for all taxpayers above the 22% bracket
  4. It applies only to taxpayers who itemize deductions

Explanation

The standard deduction is a fixed amount set by filing status that reduces taxable income, and taxpayers generally claim it when it exceeds their itemized deductions. It is a deduction, not a credit, so its value depends on the taxpayer's marginal rate.

Question 34Wealth Management

A 35-year-old client wants to save for retirement in a workplace plan and expects to change employers several times. Which feature most favors rolling balances into an individual retirement account at each job change?

  1. Continued tax deferral with broader investment choice Correct answer.
  2. Loss of creditor protections
  3. Forfeiture of the employer match
  4. Immediate taxation of the rolled amount

Explanation

A direct rollover preserves tax deferral and typically widens the investment menu beyond the former employer's plan. Rollovers must be executed properly to avoid taxable distribution and penalty treatment.

Question 35Wealth Management

A client owns a bond fund with an average duration of 4. If yields fall by 50 basis points, what is the approximate expected price change?

  1. A gain of about 8%
  2. A decline of about 2%
  3. A gain of about 2% Correct answer.
  4. No change in price

Explanation

Price change is approximately the negative of duration times the yield change, so a 0.5% decline in yields with duration of 4 implies a gain of about 2%. Duration estimates are approximate and convexity causes actual gains to exceed the linear estimate slightly.

Question 36Wealth Management

A client's portfolio has a beta of 1.3 and the market is expected to return 9% while the risk-free rate is 3%. Using the capital asset pricing model, what is the expected return?

  1. 10.8% Correct answer.
  2. 9.0%
  3. 12.0%
  4. 7.8%

Explanation

CAPM expected return equals the risk-free rate plus beta times the market risk premium, or 3% plus 1.3 times 6%, which is 10.8%. The market risk premium is the expected market return minus the risk-free rate.

Question 37Wealth Management

A client wants to transfer assets to heirs while retaining a lifetime income stream and removing the assets from the taxable estate. Which arrangement fits that description?

  1. A revocable living trust
  2. A payable-on-death account
  3. An irrevocable grantor retained annuity trust Correct answer.
  4. A joint tenancy with right of survivorship

Explanation

A grantor retained annuity trust lets the grantor receive annuity payments for a set term while the remainder passes to heirs and is removed from the estate. Revocable trusts and survivorship arrangements keep the assets in the estate or give no retained income.

Question 38Wealth Management

Under the fiduciary duty of loyalty, an adviser faces a client's purchase of a security the adviser personally owns. Which action best satisfies that duty?

  1. Obtain informed client consent after full written disclosure of the conflict Correct answer.
  2. Execute the trade and disclose the ownership afterward
  3. Avoid disclosure to protect the client from unnecessary detail
  4. Rely on the client's general consent given at account opening

Explanation

The duty of loyalty requires advisers to identify conflicts and obtain informed consent, ordinarily through full written disclosure before the transaction. General boilerplate consent at account opening is generally insufficient for a specific conflict.

Question 39Wealth Management

A client holds a variable annuity inside a traditional IRA. Which statement best describes the tax consequence of that arrangement?

  1. It creates an additional layer of tax deferral beyond the IRA's own deferral
  2. It converts future withdrawals to tax-free income
  3. It has no incremental tax benefit because the IRA already defers taxation Correct answer.
  4. It makes the annuity contributions currently deductible

Explanation

An IRA already provides tax deferral, so placing a variable annuity inside it adds cost without additional deferral benefit. Annuity contributions are not deductible and withdrawals remain taxable as ordinary income.

Question 40Wealth Management

A client's employer offers a 401(k) with a 50% match on contributions up to 6% of salary. What is the most efficient first step in the client's savings plan?

  1. Suspend contributions until the account balance is larger
  2. Contribute at least 6% of salary to capture the full match Correct answer.
  3. Maximize a spousal IRA before any 401(k) contribution
  4. Contribute only 2% and direct the rest to a taxable account

Explanation

Contributing at least 6% captures the full employer match, which is an immediate return that generally exceeds any alternative use of those dollars. Lower contribution rates forfeit part of that free employer money.

Question 41Wealth Management

A client wants to minimize the estate tax exposure of a $4 million portfolio while preserving flexibility to change beneficiaries. Which approach best balances those goals?

  1. A revocable living trust with all assets titled to it
  2. A durable power of attorney for finances
  3. An irrevocable life insurance trust funded with a large policy Correct answer.
  4. Outright gifts of the entire portfolio today

Explanation

An irrevocable life insurance trust can remove policy proceeds from the taxable estate while providing liquidity for heirs, though it sacrifices some control. A revocable trust preserves flexibility but does not reduce estate inclusion.

Question 42Wealth Management

An adviser is comparing two funds with identical returns but different expense ratios. Which effect should the adviser emphasize to the client over a long holding period?

  1. Expense ratios are refunded at redemption
  2. Expense ratios affect only the fund's tax reporting
  3. Higher expenses compound against the client and reduce ending wealth Correct answer.
  4. Expense ratios are offset dollar for dollar by 12b-1 fees

Explanation

Expense ratios are deducted from fund assets continuously, so higher costs compound negatively and meaningfully reduce long-run ending wealth. Small annual differences grow large over decades.

Question 43Wealth Management

A client nearing retirement holds a large position in employer stock inside a 401(k) and is past age 59½. Which tax rule may reduce the tax on net unrealized appreciation?

  1. The net unrealized appreciation election Correct answer.
  2. The wash sale rule
  3. The straddle rule
  4. The constructive sale rule

Explanation

The net unrealized appreciation election allows the cost basis of employer securities distributed from a qualified plan to be taxed as ordinary income while appreciation is taxed at capital gains rates when sold. This can produce significant savings for low-basis employer stock.

Question 44Wealth Management

A client's portfolio has returned 14% with a beta of 1.2, the market returned 10%, and the risk-free rate is 2%. What is Jensen's alpha?

  1. 4.0%
  2. 0.4%
  3. 1.6%
  4. 2.4% Correct answer.

Explanation

Jensen's alpha equals the actual return minus the CAPM expected return, where expected return is 2% plus 1.2 times 8%, or 11.6%. The difference of 14% minus 11.6% is 2.4%, indicating outperformance after adjusting for systematic risk.

Question 45Wealth Management

A client sells a stock at a $30,000 loss and repurchases the same stock 20 days later. What is the tax result under the wash sale rule?

  1. The loss is deferred until the replacement shares are sold and then permanently lost
  2. The loss is converted to a long-term capital loss
  3. The loss is fully deductible in the year of sale
  4. The loss is disallowed and added to the basis of the replacement shares Correct answer.

Explanation

A purchase of substantially identical securities within 30 days before or after a loss sale triggers the wash sale rule, disallowing the loss and adding it to the basis of the replacement shares. The loss is effectively deferred rather than eliminated.

Question 46Wealth Management

A client with a moderate risk tolerance holds a portfolio concentrated in a single sector that has recently surged. Which action best reflects prudent portfolio management?

  1. Rebalance toward target weights to control concentration risk Correct answer.
  2. Borrow against the position to buy more of the same sector
  3. Increase the position to capitalize on momentum
  4. Hold the position unchanged to avoid realizing gains

Explanation

Rebalancing back to target weights controls unintended concentration and aligns the portfolio with the client's stated risk tolerance. Momentum-based additions and leverage increase the risk of a severe drawdown.

Question 47Wealth Management

A client's marginal rate is 35% and the client holds a taxable bond yielding 5.5%. What after-tax yield does the client keep?

  1. 3.58% Correct answer.
  2. 4.25%
  3. 1.93%
  4. 5.50%

Explanation

The after-tax yield equals the pre-tax yield times one minus the marginal rate, or 5.5% times 0.65, which is about 3.58%. Comparing this figure with a municipal yield shows which bond delivers more after tax.

Question 48Wealth Management

A client wants to gift assets to a child but retain the right to reclaim them if the client later needs funds. Which arrangement creates the greatest risk that the gift is ineffective for transfer tax purposes?

  1. A gift with a retained right to revoke or reclaim the assets Correct answer.
  2. A gift to a 529 plan with the client as account owner
  3. A completed outright gift with no retained interest
  4. An irrevocable trust with an independent trustee

Explanation

Retaining a power to revoke or reclaim assets keeps them in the donor's estate and defeats the purpose of removing them from the taxable estate. Completed gifts and irrevocable trusts generally succeed in removing the assets.

Question 49Wealth Management

An adviser manages a portfolio benchmarked to a broad index and reports an information ratio of 0.8. Which interpretation is most accurate?

  1. The portfolio underperformed its benchmark by 0.8% annually
  2. The portfolio earned 0.8% of excess return per unit of tracking error Correct answer.
  3. The portfolio's beta equals 0.8
  4. The portfolio's Sharpe ratio must also equal 0.8

Explanation

The information ratio divides active return above the benchmark by tracking error, so 0.8 means 0.8 units of excess return per unit of tracking error. It measures the efficiency of active risk taking rather than beta or absolute performance.

Question 50Wealth Management

A client in the 32% bracket is deciding between a taxable bond yielding 6% and a municipal bond yielding 4.4%. Assuming state taxes are zero, which choice is better after tax and by how much?

  1. The taxable bond by about 0.32 percentage points
  2. The two are exactly equivalent
  3. The taxable bond by about 1.60 percentage points
  4. The municipal bond by about 0.32 percentage points Correct answer.

Explanation

The taxable bond's after-tax yield is 6% times 0.68, or 4.08%, while the municipal bond yields 4.4% tax free. The municipal bond therefore wins by about 0.32 percentage points.