Characteristics, Uses and Taxation of Investments - Zero-Coupon and Municipal Bonds
Types of Municipal Bonds
Zero-Coupon Bonds: corporations are the typical issuers (please refer to the discussion of treasury STRIPS for a description of the private sector-created
c. Municipal Bonds: these are interest-bearing certificates issued by municipalities (states, cities, counties, school districts, parishes, etc.). They are held in taxable portfolios of wealthy individuals in higher tax brackets to take advantage of the tax-exempt yield. Residents of a state with a state income tax that hold municipal bonds for that state often enjoy exemption from state income tax. Finally, interest income on obligations of a
Example: Pretax yield = tax - exempt yield/1-marginal tax rate. For an investor in the 30% marginal tax bracket, a municipal bond paying 5% would have a taxable equivalent yield of 7.14% calculated as follows. 7.14%=5%/1-30%. One may infer from the following table that the higher the individual's marginal tax bracket, the greater the advantage of using a municipal bond.
Municipal Bond Yield
Investing BasicsBuying below the margin of safety minimizes the risk to the investor.
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