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
Finance Allah Shmoop What are serial bonds term bonds and
staggered maturity Sze of bonds Well let's start with the
serial bonds No not not that serial bonds Come do
it Purposely measured durations like we dig you Tractor company
needs to buy a new factory that'll cost one hundred
million bucks They know that they're operating Profits will pay
Hey back that hundred meal over time So they sell
one hundred million dollars worth of cereal bonds to the
public that come do serially in two years four years
six years and eight years and then are fully retired
a decade later where every two years ah lottery wheel
spins and a traunch of those serial bonds is called
they have effectively staggered the maturity of their bonds in
having these serial bonds come due on different dates you
know spread nicely apart like years apart Technically they could
have also just offered five different series of bonds at
twenty million bucks each which come do it different durations
that would be directly staggering The maturity Sze of them
Well why would you want to stagger The maturity is
of bonds anyway because companies do much better refinancing or
raising money in small amounts all the time over long
periods of time rather than say having all fourteen billion
dollars of some huge principal debt come do all that
same week Should something go awry in the company be
unable to either refinance that principle or pay it all
back Well then they end up here structurally Financial managers
of companies embrace term bonds I'ii bonds that run for
a certain term or time period and then they're callable
or they mature or they convert into stock at a
given price per share But simply while those bonds then
don't at least come do all the same day and
put the company at risk for the goal here is
to stagger the maturity of bonds so that companies never
feel illiquid or like they have a gun to their
head to suddenly come up with a ton of cash
to a snarling group of Wall Street bond investors who
spell forgive this way
Up Next
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...
Who buys muni bonds? Municipal bonds are bonds that are issued by municipal government entities, such as states, cities, townships, etc. What makes...
What is the difference between taxable and untaxed returns? Not all returns and investments are taxed. Some of these can be considered nontaxable i...