Municipal Bonds

Municipal bonds (munis) issued by state and local governments in the U.S. are an important sector in fixed-income markets because the interest income is exempt from federal taxation. Issuers are not allowed to “arbitrage” the market—that is, they are not allowed to issue debt at low yields due to the exemption and turn around and invest the funds at a higher rate. The exempt status of munis appeals to wealthy individuals and some institutions as part of their tax management strategies. Investors might also be exempt from state and local income taxes if they reside in the issuer's locality. That can definitely matter to those of you living in certain high-tax East Coast cities and states.

Investors often evaluate a municipal bond ...

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