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BANK OF NEW YORK: WELCOME TO THE 50/50 CLUB -- $1.00 FOR YOU AND $1.00 FOR THE TAX COLLECTOR

 NEW YORK, Feb. 25 /PRNewswire/ -- The following was released today by the Bank of New York:
 Municipal bonds look even more attractive now that increasing income tax rates have become a reality. Everyone knew that tax rates would be going up but somehow hoped that the tax rise would not affect them. Now that the reality of increased taxes is with us, municipal bonds still represent a vehicle to diminish the tax bite, while at the same time contributing to the rebuilding of America's infrastructure.
 If the highest tax rate goes to 36 percent with a surcharge of 10 percent for individuals making over $250,000, the marginal tax rate for federal purposes is 39.6 percent. When you add on state taxes from those states with high rates, the effective marginal tax burden approaches 50 percent. Welcome to the 50/50 Club -- $1.00 for you and $1.00 for the tax collectors.
 The surcharge on individuals making over $250,000 was a surprise to many. The expectation had been that the surcharge would apply only to those with incomes in excess of $1 million. We now have a new class of taxpayers -- the "quarter-millionaires."
 The impact of increased taxes can be dramatic when you compare municipal bond returns with taxable returns. For example 5.75 percent tax free is the equivalent of 9.50 percent subject to the highest federal tax rate. Add on the potential benefit of avoiding state taxes and the advantage increases even more. Municipal bonds with returns of 5.75 percent are available for quality investments whereas 9.50 percent from taxable bonds could require substantial compromises on investment quality.
 For those investors who are concerned about current interest rate levels -- acknowledging that interest rates are at levels that we have not seen in many years -- my recommendation would be to stay with intermediate term bonds. Investing in long term bonds does not provide a substantial increase in return over the intermediate range. For example, an investor can get approximately 5.50 percent from municipal bonds in the twelve year maturity range, while 30 year bonds return around 6.00 percent. To go to a 30 year bond represents picking up substantial risk should interest rates move up. By staying in an intermediate maturity, say twelve years, the investor gets more than 90 percent of the interest income that would be obtained by extending to thirty years. The flatness of the yield curve makes extensions of maturities beyond the intermediate range unattractive due to the small pickup in income.
 All fixed income sectors have seen a compression in quality. The spread differential between top quality and intermediate quality bonds is very slim by historic standards. The investor is not compensated for taking the modest extra risk by going from high quality to intermediate quality bonds. Therefore, tilt towards higher quality when considering municipal bonds since the difference in returns between high quality and low quality bonds is small. In today's market buying high quality bonds does not result in an appreciable reduction in returns.
 Forthcoming major municipal bond issues which will represent good value to the investor include the following:
 -- Massachusetts Water Pollution Abatement Trust
 -- Washington Suburban Sanitation District, Maryland
 -- Durham, N.C.
 -- Memphis, Tenn.
 -0- 2/25/93
 /CONTACT: Steven Bruce or Rick Stockton of The Abernathy/MacGregor Group, Inc., 212-371-5999, for The Bank of New York, or (investors) James J. Cooner, senior vice president of The Bank of New York, 212-635-6918/
 (BK)


CO: Bank of New York ST: New York IN: FIN SU:

TS -- NY059 -- 0434 02/25/93 13:41 EST
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Publication:PR Newswire
Date:Feb 25, 1993
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