Learn what makes a single bond tax-exempt, why after-tax yield matters,
A tax-exempt bond is a bond whose interest income receives favorable tax treatment, most commonly exemption from federal income tax and sometimes from state or local tax as well.
In many cases the term refers to a municipal bond issued by a state or local government entity.
The main attraction is not the headline coupon alone. It is the after-tax yield.
An investor in a high tax bracket may prefer a lower nominal yield on a tax-exempt bond if the after-tax result is better than a taxable alternative.
Tax-exempt status does not remove:
The bond still has to be evaluated as a fixed-income instrument. The tax treatment is only one part of the decision.