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March 21, 2001     Beverly Hills Weekly
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March 21, 2001
 

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uest i YOUR MONEY By John Halstead Welcome to my ne,~ intcracC~e, linancPd column IOl dw BC%CI]'~ Hills \VceklL I anl a prolessor ,d" ethan(relics and finance ~ Southern Cunnccti,ut State Uni~ersdy in New Haven, Connecticut Q Some of m) friendsbe~ctccend~ invested d a cdgrc md \khat i~ ahedgelund? A A hedge lund is a pdvale iu~esmlcnl partnership defined ;is hcmg mainly hec ILnn the Seeurdies and Exchange discIo';u/e rcqmzements and Icgui:~t~,rv c~,n~ll,ls ot the lnvcshncm Crimp:my Act ~,i 1940 acloze 19% ~L hedge fund could ha~e :t n~a~,imun/ number of 99 acclcddcd in';es~ors to qualff> i,,r cclusion flora tile At1 In 199(', undcT tbe NaUonal Securgics Marge~s Inq~roven~cnt Ac~ ~hc maxnnum number nf accpcdhcd investors was increased ~o 500 An accredded invesau is defined as one wht~ has a ncl ~orth of at least $1 million, ealncd at least $2OO,000 in each ~d the two most re~:cnt >car~, or had a joint spousal inc(~me of at leasl $300.000 in each of the twu mosl recenl years A hedge fund typically has a much higher initgd investn~ent ($I milli~m is not unc(nnn~on/ than a mutual lund. One ol the largest and must successful hedge funds in the US is Zweig/DiMenna Partners, L.E Managing Director Dt~ Martin Zweig is a popular panelist on PBS's Wall Street Week with Louis Rukeyser and a former professor of finance at hma College in New Rchelle, New York. Q: i am in a high tax bracket and am seeking to reduce the amount of taxes [ pay. A fam- ily member suggested that I look at municipal bonds. Could you please left me more about m~nicipal bonds? A: Municipal bonds are issued by state and local governments One of the nice foamres ef municipal bonds, ill contrast Io corporate bonds, is that municipal bonds' interesl Incorrle is exempt rhone lederal income taxation. In addition, die inlerest incom~ is exempt from state and local income taxation in tile issuing stale Phere are Iwo main types ol r~unicipal bonds: general obligation (G.O) bonds and revenue bottds G.f) bonds arc backed by ~he laxing power ol the issuer Revenue bonds, ill conIrasL arc issued m linance SPecific projects and are hacked by either lhe proJeCt'S revenues or by tile municipal agency operating the project Revenue bonds are typically Issued by hospdals and airp~lz. In general, G O bonds have less delauh risk Ihan revenue bonds Since nmnJcip d bonds Mve such an attractive tax status, they lypically hose lower yields than other types of bonds such as corporate bonds To determine whether it is advisable to invcsl ill a munic IPal bond. you must compare tile after tax returns on ~axabie and municipal bonds Here's formula to do Ihat. Let t be defined a~ your marginal lax bracket. ~ bc detincd as the total Pre-tax return on a taxable bond, and m be defined as the total return on e munici H bond. If r rradtiplied by l-t is greater than m, then you would do better buying the taxabPle bond. On the other hand, if r multiplied by 1-t is less than m, the municipal bond would be the better investment Let's plug in some numbers Assume that your marginal tax bracket is 40%, the axab e bond's return is 8%, and the municipal b nd's return is 6~ There "ore, the taxable bond's after-tax return is 4.g%. Hence. in this case, tile municipal bond is the rnpee attractive in,~estment. U John Halstead is a professor of economics arm finance at Southern Connecticut State nJVersity in New Haven, Connecticut. Readers with financial quest*ons may e mail him at lohn@bhweeklycom or mail them to." professor John Halstead, Southeru Connecticut State Unive s" , ~501 Cresce Street New Haven CT 0651 ~ Con tdentialit'; will b r it), , .... rfi . e enSUred, Only your initials and town will be printed in this column. Oi,Tclaimer Io 7"he a&i,e contained m tlu~ t olumn i~ m,t intended to repta, e that ol a pr,gev.,i,,nal a&~,,,~ 7Ylis , ,,tumn is I, ~ lnYorma;u,n purposes only 4t~tw,,gh the i~,rmar~on ,,,manned ,~ thl~ , ~t.mn ,r b.sed ,m .,,,ur~e~ t&,t are ~evcd to be reliable..c, ura, y ~anm,t be guaranteed, tt~er no vir,'.m.,tances a~,,~,td i~ be a,5.mea t~ar ,nfor~ nlat~o~ Provided in th~ e.lum,a wftt be proI able ,Jr v..lll equal past pe~ rman e ~ere ,~ a~,olu~et> n~, guar. ant. , Herman Alterations MEN'S-LADIES' ALTERATIONS- RESTYLE, CUSTOM DESIGNS Plus Interior Home Decor Fashion-Custom Drapery, Bedspreads, Many Fabrics. 8825 W, Pico Blvd.- 1 Block West of Robertson Blvd. Mort to Thur 9 am- 6 pm (310) 278-1894 Friday 9 am- 4 pm Lyuba Kaplan (Sunday Appointment--Only) TAX PREPARATION & BOOKKEEPING BY EXPERIENCED & LICENSED PROFESSIONAL *Over 9 years experie.ce with tax preparation Ill" individuals & busines,~es *Over 7 years experience with Quickbool..s & Quicken financial soRware *Current, prior year; and ~ll|ll2nded relurns *Lo~ rates & mobile service MARK J. 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