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If you are looking to invest in municipal bonds, you should first understand how tax exempt yield works. The higher the tax bracket of the investor, higher is the yield. For example, an investor is thinking of buying a 6 percent municipal bond at par and he is in the 28 percent tax bracket, the tax-free yield will be higher for him than 6 percent.
To calculate tax free yield, you can use the following formula:
Tax free yield = Municipal state rate divided by 100 minus tax bracket
Types of Municipal Bonds:
There are primarily two types of municipal bond and they are as follows:
These are the most common municipal bonds and are also the better rated ones. A state that raising money and backing a bond issue with higher income or sales tax is considered to be general obligation bond.
A school district raising money through a dealer using school or property revenue tax to secure the bond is also considered to be a general obligation bond.
Issues that are dependent on revenue producing ability of a facility are known as revenue bonds. There are many types of issuers that would fall under this category, namely transportation, health care, utility companies, and industrial units.
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