From the course: Understanding Capital Markets

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Municipal bonds and the tax exemption

Municipal bonds and the tax exemption

From the course: Understanding Capital Markets

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Municipal bonds and the tax exemption

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- [Instructor] Let's take a closer look at municipal bonds to see if they might be right for you. Investors in municipal securities are exposed to the same risks affecting corporate bonds, but they also have one more risk that we can call tax risk. There are basically two types of tax risk for muni bonds. The first element of risk is that the individual federal income tax rate will be reduced. If tax rates are reduced that makes the muni tax exemption less valuable. Think about it for a minute. If the tax rate is 0% at the federal level, well then the fact that you're exempt from taxes doesn't matter, you don't pay anything anyway. If the tax rate is 99% meaning you pay 99 cents of every dollar that you earn to the government, well then that tax exemption is extremely valuable. So the lower the federal income tax rate is the less valuable that muni tax exemption is. The second element in tax risk is if the IRS…

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