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Municipal bonds

 

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Municipal bonds (munis) in the United States are issued by government agencies. Municipal bonds are guaranteed only by the local government and are rated accordingly. Municipal bonds are tax exempt from Federal taxes and the state in which they are issued.

The relation between the interest rate of a municipal bond and a comparable corporate bond is as follows:

 rm = rc ( 1 - t )

where

 rm = interest rate of municipal bond
 rc = interest rate of comparable corporate bond
 t = tax rate

For example if:

 rc = 10%
 t = 38%
then
 rm = .10 (1 - .38) = 6.2%

A municipal bond that pays 6.2% is comparable to a corporate bond that pays 10% (assuming all else is equal)

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