Tax-Exempt Sector

DEFINITION of 'Tax-Exempt Sector'

The market niche comprised of investment vehicles exempt from federal taxes. Nearly all investments in this area are municipal bonds, which cannot be taxed owing to the fact that U.S. law forbids the federal government from taxing debt issues offered by state and local government agencies. These tax exemptions offer investors incentives to purchase low-yield government bonds over higher yielding corporate fixed income securities.

BREAKING DOWN 'Tax-Exempt Sector'

Although most municipal bonds are tax-free, this is not always the case, as the tax status sometimes depends on what the bonds are being used for. In addition, many municipal bonds, as well as other tax-exempt investments, offer lower yields than taxable investment options.

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RELATED FAQS
  1. How are municipal bonds taxed?

    Discover information about trading municipal bonds, specifically the various tax implications municipal bonds have at state ... Read Answer >>
  2. Where can I buy government bonds?

    The type of bond determines where you can purchase it, so you need to decide which type of bond you would like to purchase ... Read Answer >>
  3. What do cities do with the funds generated from municipal bonds?

    Learn more about municipal bonds, including the various types of bonds issued and the purposes of municipal bond funds, such ... Read Answer >>
  4. What is the difference between municipal bonds and standard money market funds?

    The primary difference between municipal bonds - also known as "munis" - and money market funds is that municipal bonds are ... Read Answer >>
  5. How do the returns on municipal bonds compare to those of other bonds?

    Learn how tax-free municipal bonds may provide better returns than other types of bonds, and understand the risks of municipal ... Read Answer >>
  6. What is a triple tax-free municipal bond?

    At its core, a triple tax-free municipal bond is just like any corporate bond: it is a debt instrument, a loan given to a ... Read Answer >>
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