Definition of "Tax-exempt bond"

Peggy Wilkins real estate agent
Peggy Wilkins, Real Estate Agent Century 21 Gold Star Realty

Bond whose interest is free of federal, state, or local tax in the state of the issuer. It is typically a municipal bond of estate or county agency. For example, a New York City resident does not pay federal, state, or city tax on the interest received from a New York City obligation. It is triple tax-free though this is not necessarily the case with other states. The return on a tax-exempt bond is equivalent to a higher return on a taxable corporate bond because of the tax savings. The dollar advantage of a tax-exempt security increases as the tax rate rises. Assume a taxpayer in the 31% tax bracket receives 5% on a tax-exempt bond. The equivalent taxable yield on a corporate bond is 7.2%(5%/.69).


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