The conversation with Mr. Spielberg regarding the bond in question 7 did not go well and you offer now ask that he consider the following: He can claim residence in a state with a 3% income tax rate, and his Federal bracket is 35%. You have two bonds to offer him: a) a $1000 par bond that is fully taxable and pay 10% and b) a $1000 par bond that pays 7% but is exempt for state and Federal taxes. Which one should he purchase?