Municipal bond
Municipal bonds (munis) in the United States are issued by government agencies. Municipal bonds are guaranteed only by the local government and are rated accordingly. Municipal bonds are tax exempt from Federal taxes and the state in which they are issued.
The relation between the interest rate of a municipal bond and a comparable corporate bond is as follows:
rm = rc ( 1 - t )
where
rm = interest rate of municipal bond
rc = interest rate of comparable corporate bond
t = tax rate
For example if:
rc = 10%
t = 38%
then
rm = .10 (1 - .38) = 6.2%
A municipal bond that pays 6.2% is comparable to a corporate bond that pays 10% (assuming all else is equal)
