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Should You Buy Municipal Bonds?
Categories: Invest Wisely
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"Munis" are debt obligations issued by a state or local municipal government or agency, often to support a specific public works project. With tax-free munis, you pay no federal taxes on the interest and no state or local taxes if the bond was issued in the state where you reside.
It doesn't make sense to invest in munis if you're in the 15% tax bracket. Single or joint filers in a higher tax bracket, however, should seriously consider buying them.
Dolan Smart Money Move: Should you buy munis instead of taxable bonds? Your decision should be determined by the effective yield of the tax-free bond you're considering.
The yield on municipal bonds is usually less than the yield you would get from taxable bonds of the same maturities. However, because you don't pay tax on municipal bond income, your actual "net" yield could be higher than the taxable yield you receive from corresponding corporate bonds, depending on your tax bracket.
To calculate your taxable equivalent yield, divide the tax-exempt yield by 1, MINUS your tax bracket. For instance, if you want to buy a municipal bond yielding 4.5%, and you're in the 36% tax bracket, your effective yield would be 5.47%.
Here's the math: 4.5 / (1 - 0.36), or 4.5 / 0.64 = 5.47%. So you would get the same amount of money in your pocket from both a high-quality municipal bond that is yielding 4.5% and a corporate bond that is yielding 5.47%.
As with all taxable versus tax-free decisions, we recommend that you check the taxable equivalent yield before you make your final decision. If munis do make good sense for you, invest in the highest-rated municipal bonds you can find, hold until maturity - and enjoy the tax-free income!
If you're looking for more information on munis, we recommend two excellent sites: www.bondsonline.com and www.investinginbonds.com.
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May 31, 2010 11:42 AM
The math is wrong, no?
>Here's the math: 4.5 / (1 - 0.36), or 4.5 / 0.64 = 5.47%.
October 30, 2010 1:50 PM
The math is either wrong or all my calculators got the same glitch at once. 4.5 divided by .64 = 7.032. Would someone explain how 4.5 divided by .64 = 5.47%? I'm extremely confused about this. Except for that, I found the website to be very informative.
View unverified member's comment - posted by zygor guides free
View unverified member's comment - posted by toyota yaris
May 4, 2011 5:57 PM
Hm, the probable solution must be
4.5 / (1 - 0.36), or 4.5 / 0.64 = 5.47%
I think you should revise the one on the post. Overall the post is very informative.
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Demarini CF4
August 12, 2011 7:21 AM
When you buy a municipal bond, you are loaning money to the issuer in exchange for a set number of interest payments over a predetermined period.
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August 12, 2011 7:21 AM
updated: August 12, 2011 7:22 AM
At the end of that period, the bond reaches its maturity date, and the full amount of your original investment is returned to you.
September 12, 2011 4:33 AM
The particular mathematics is actually either incorrect or even all my hand calculators got the identical glitch simultaneously. some.a few separated simply by .sixty-four = several.032. Might somebody explain just how 4.5 split through .64 = 5.47%? Now i'm very confused about this particular. Except for in which, I came across the site to be very educational
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September 12, 2011 4:36 AM
The particular mathematics is actually either incorrect or even all my hand calculators got the identical glitch simultaneously. some.a few separated simply by .sixty-four = several.032. Might somebody explain just how 4.5 split through .64 = 5.47%? Now i'm very confused about this particular. Except for in which, I came across the site to be very educational
Matiar
November 26, 2011 4:03 PM
Hm, the probable solution must be
4.5 / (1 - 0.36), or 4.5 / 0.64 = 5.47%
I think you should revise the one on the post. Overall the post is very informative.
Websitechnik
December 21, 2011 1:13 AM
updated: December 21, 2011 1:14 AM
Here's the math: 4.5 / (1 - 0.36), or 4.5 / 0.64 = 5.47%. So you would get the same amount of money in your pocket from both a high-quality municipal bond that is yielding 4.5% and a corporate bond that is yielding 5.47%.
This seems to me a good solutions, but the rise was quite high in my opinion.
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Ken
View unverified member's comment - posted by kristle
View unverified member's comment - posted by Forex Rebates
March 10, 2012 4:28 AM
Municipal bonds, or "munis" for short, are IOU's issued by city, county, and state governments in order to raise money for community projects such as a highway, new school, or hospital. Their primary attraction is that the interest paid to the owner of a municipal bond is exempt from Federal taxes. In most cases, an investor is exempt from state taxes as well if he resides within the same state in which the municipal bonds were issued.
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