Municipal Bond (Tax-Free)

Category: tax

Debt securities issued by local governments, where the interest is often exempt from federal and some state income taxes.

Munis are the "tax shelter." Because the interest is tax-free, they are popular with high-income earners who would otherwise pay 35%+ in taxes on corporate bond interest. The lower "nominal" rate is often worth it due to the "tax-equivalent" yield.

Common Examples

• The high-bracket earner shifted their portfolio into tax-free municipal bonds to optimize their after-tax income profile.
• We calculated the tax-equivalent yield to prove that the municipal bond was a better investment than a higher-paying corporate alternative.