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Municipal bond arbitrage, also called municipal bond relative value arbitrage, municipal arbitrage, or just muni arb, generally consists of building a leveraged portfolio of high-quality, tax-exempt municipal bonds and simultaneously hedging the duration risk in that municipal bond portfolio by shorting the equivalent taxable corporate bonds.
Tax-exempt securities represented about 80% of trading volume in U.S. municipal bonds in 2020. [13] Interest income from most municipal bonds is excludable from gross income for federal income tax purposes, and may be exempt from state income tax as well, depending on the applicable state laws. [14] Internal Revenue Code section 103(a) is the ...
These rules prevent the avoidance of tax that might otherwise be available by characterizing the repayment as a capital gain, which is taxed at a lower rate, or by deferring the recognition of income until the bond is repaid at maturity. There are a number of exceptions to the original issue discount rule, including: Tax exempt obligations
Interest income from Treasury bonds is subject to federal income tax but exempt from state and local taxes. This exemption can be particularly beneficial for investors in high-tax states.
In many cases, it could make sense to go with a lower-yielding tax-free bond than a high-yielding traditional bond, because the after-tax yield on the muni bond is ultimately higher.
Build America Bonds can provide states and localities with substantial savings on their borrowing costs. According to the United States Department of the Treasury, the savings for a 10-year bond are estimated to be 31 basis points and the savings for a 30-year bond are estimated to be 112 basis points versus traditional tax-exempt financing. [5]
The IRS sent three "Notices of Proposed Issues" in January 2009, challenging the tax-exempt status of the bonds on three grounds: the Issuer does not qualify as a political subdivision or "on behalf of the issuer" of tax-exempt bonds pursuant to Section 1.103-I(b) of the Internal Revenue Code regulations,
The bonds in this fund are generally exempt from federal income taxes, which is why the stated yield is lower than taxable funds. Yield: 4.27 percent Expense ratio: 0.32 percent