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For example, imagine you pay federal tax at a 24 percent rate and state tax at a rate of 6 percent, and the municipal bond offers a yield of 3 percent.
Where r m = interest rate of municipal bond, r c = interest rate of comparable corporate bond and t = investor's tax bracket (also known as marginal tax rate): [35] = For example, assume an investor in the 38% tax bracket is offered a municipal bond that has a tax-exempt yield of 1.0%.
This is essentially how tax-free municipal bonds work. Investors lend money to the government in exchange for periodic interest payments until the bond reaches its maturity date, at which point ...
The tax rate applied to these capital gains depends on the length of time the bond was held. ... while the interest income may be tax-free, capital gains from selling municipal bonds are subject ...
Positive, tax-free carry can reach into the double digits. The bet in municipal bond arbitrage is that, over a longer period of time, two similar instruments--municipal bonds and interest rate swaps--will correlate with each other; they are both very high quality credits, have the same maturity and are denominated in U.S. dollars.
Taxation: Interest income from municipal bonds is often tax-exempt at the federal level and may also be exempt from state and local taxes if the investor resides in the issuing state. Interest ...
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