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Bonds can provide passive income, some of which may be tax-free if you're investing in municipal bonds. The tax-equivalent yield formula can be a useful tool for comparing taxable and tax-free ...
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.
For example, assume an investor in the 38% tax bracket is offered a municipal bond that has a tax-exempt yield of 1.0%. Using the formula above, the municipal bond's taxable equivalent yield is 1.6% (0.01/(1-0.38) = 0.016) - a figure which can be fairly compared to yields on taxable investments such as corporate or U.S. Treasury bonds for ...
Municipal bonds may be exempt from federal, state and local income tax. ... Tax-deferred or tax-exempt accounts may have lower yields than regular taxable accounts, but the tradeoff is less risk ...
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.
The tax-exempt status makes them attractive to individuals in higher tax brackets, who can effectively increase their return on investment through tax savings. Pros and Cons of Municipal Bonds
However, unlike other triple tax exempt bonds, Puerto Rican bonds uphold such exemption regardless of where the bond holder resides. [a] This has made Puerto Rican bonds extremely attractive to municipal investors as they may inure from holding a bond issued by a state or municipality different from the one where they reside. This advantage ...
Tax-Equivalent Yield (TEY) – This is the return that a taxable bond needs to match the yield on a comparable tax-exempt bond. Bond Price vs. Yield: Why It Matters?
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