Taxable Municipal Bond

  

Categories: Tax, Muni Bonds

Most municipal bonds are exempt from federal taxes. The theory goes that these local government projects create value for the community, so the federal government gives the bonds a market advantage by making them tax-free.

However, if the federal government determines that a particular bond issue does not create funds that will be used for helping the overall local community, it might deny tax-exempt status. Like, say, new rims for the mayor's car, or a luxury salon in City Hall that can only be used by members of the city council.

These situations lead to taxable municipal bonds: debt securities issued by local governments that don’t get the usual break from federal taxes.

Related or Semi-related Video

Finance: What are serial bonds, term bon...5 Views

00:00

Finance Allah Shmoop What are serial bonds term bonds and

00:05

staggered maturity Sze of bonds Well let's start with the

00:10

serial bonds No not not that serial bonds Come do

00:14

it Purposely measured durations like we dig you Tractor company

00:18

needs to buy a new factory that'll cost one hundred

00:20

million bucks They know that they're operating Profits will pay

00:23

Hey back that hundred meal over time So they sell

00:25

one hundred million dollars worth of cereal bonds to the

00:28

public that come do serially in two years four years

00:31

six years and eight years and then are fully retired

00:34

a decade later where every two years ah lottery wheel

00:37

spins and a traunch of those serial bonds is called

00:40

they have effectively staggered the maturity of their bonds in

00:44

having these serial bonds come due on different dates you

00:47

know spread nicely apart like years apart Technically they could

00:51

have also just offered five different series of bonds at

00:54

twenty million bucks each which come do it different durations

00:57

that would be directly staggering The maturity Sze of them

01:01

Well why would you want to stagger The maturity is

01:03

of bonds anyway because companies do much better refinancing or

01:07

raising money in small amounts all the time over long

01:11

periods of time rather than say having all fourteen billion

01:14

dollars of some huge principal debt come do all that

01:17

same week Should something go awry in the company be

01:21

unable to either refinance that principle or pay it all

01:24

back Well then they end up here structurally Financial managers

01:28

of companies embrace term bonds I'ii bonds that run for

01:31

a certain term or time period and then they're callable

01:34

or they mature or they convert into stock at a

01:36

given price per share But simply while those bonds then

01:40

don't at least come do all the same day and

01:42

put the company at risk for the goal here is

01:44

to stagger the maturity of bonds so that companies never

01:47

feel illiquid or like they have a gun to their

01:49

head to suddenly come up with a ton of cash

01:51

to a snarling group of Wall Street bond investors who

01:55

spell forgive this way

Up Next

Finance: What is a Muni Bond?
24 Views

What is a muni bond? Muni bonds are bonds issued by the government. They are used to raise the money required to pay for government responsibilitie...

Finance: Who buys muni bonds?
1 Views

Who buys muni bonds? Municipal bonds are bonds that are issued by municipal government entities, such as states, cities, townships, etc. What makes...

Finance: What is the Difference Between Taxable and Untaxed Returns?
2 Views

What is the difference between taxable and untaxed returns? Not all returns and investments are taxed. Some of these can be considered nontaxable i...

Find other enlightening terms in Shmoop Finance Genius Bar(f)