Tax-Exempt Bond Investments refer to bonds issued by governmental entities or certain nonprofit organizations that generate interest income which is not subject to federal income tax and, in some cases, state and local taxes.
These bonds are typically used to finance public projects such as schools, highways, and hospitals. Investors in tax-exempt bonds receive lower interest rates compared to taxable bonds; however, the tax benefits may result in a higher after-tax return for the investor.
For example, if an investor purchases a municipal bond with a 4% interest rate, the interest earned might be exempt from federal taxes, potentially making it more advantageous than a taxable bond with a higher interest rate, depending on the investor’s tax bracket.
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