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Dear Mr. Berko:

Dear M.S.:

Vanguard’s Taxable Money Market Fund is among the best on the Street, with a current yield of 5.26 percent. To the best of my knowledge, this MMF has zero exposure to the subprime stuff or to that queer 30-day commercial paper issued by the venal Kohlberg, Kravis & Roberts or commercial paper issued by villainous private equity firms, which also may implode. The Vanguard folks are too smart to get caught with trash like that.

Though there are other money market funds with higher yields (up to 5.6 percent), I’m willing to accept a little lower yield because Vanguard has exceptional liquidity and because its reputation stands behind the value of its money market fund. I’m comfortable owning it.

Vanguard’s Tax-Exempt MMF, yielding 3.55 percent, is a steady Eddie with over $21 billion in assets — equal to the net worth of college dropout Paul Allen, co-founder of Microsoft Corp. This Vanguard fund is rock-solid, managed as if it were a Swiss bank. Interest is paid monthly, and Vanguard has never, never, never had a default or missed an interest payment. I’m comfortable owning this MMF, too.

Your third question asks if Vanguard’s tax-free MMF, yielding 3.55 percent, would provide you with more spendable money than Vanguard’s taxable MMF, yielding 5.26 percent. The answer is: Yes — but not by much!

The math is simple, and here’s the formula to convert a tax-free yield into an equivalent taxable yield in your 35 percent tax bracket. Subtract your 35 percent tax bracket from 100 percent, and the result is 65. Divide that 65 into the 3.55 percent tax-free yield, and the resulting 5.46 percent is the taxable equivalent yield. For example, if you get a 5.46 percent taxable yield on $100,000, you will earn $5,460. Because you are in the 35 percent bracket, you gotta pay the Internal Revenue Service on the earnings (35 percent times $5,460) $1,911. So you get to keep ($5,460 minus $1,911) $3,549, or 3.549 percent. Now if you put that $100,000 in the tax-free MMF paying 3.55 percent, you keep $3,550, which is $1 more than $3,549. It’s basically a cold-water wash.

However, you might consider putting your $100,000 in the T. Rowe Price Tax-Free High-Yield Fund (PRFHX-$11.54), which has $1.7 billion in assets and yields 4.81 percent. PRFHX is a medium-risk, medium-quality tax-free fund that has had very little change to its net asset value over the years. I’ve watched this fund for nearly 10 years, and during its worst year (it’s only been down once) the fund’s NAV lost only 5.1 percent. The dividend has been remarkably consistent, and like Vanguard it’s a no-load fund with top tier management and excellent customer service. A $100,000 investment in the non-taxable 4.81 percent PRFHX is the taxable equivalent to earning 7.4 percent if you are in the 35 percent tax bracket. To express it another way, if you are in the 35 percent tax bracket you must have taxable earnings of 7.4 percent (which is fairly high these days) to net 4.81 percent after taxes. That sounds like a swell deal to me.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.© Copley News Service