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Tax-exempt bonds

Tax-exempt bonds. Bonds sold by local and state governments; interest paid on the bond is not taxed by the federal government. Examples. A city issuing a tax-exempt bond to build a new school The city issuing a tax-exempt bond to fixing a road with many potholes

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Tax-exempt bonds

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  1. Tax-exempt bonds Bonds sold by local and state governments; interest paid on the bond is not taxed by the federal government

  2. Examples A city issuing a tax-exempt bond to build a new school The city issuing a tax-exempt bond to fixing a road with many potholes A school issuing a tax-exempt bond to build a new playground

  3. Pros and Cons Pros Free from Federal state taxes Free from local and state taxes Get something in return (Trade off) Cons Opportunity Cost Risk of Capital Loss Interest rate risk

  4. How does Tax-exempt bonds work? When an agency issues a tax-exempt bond, it is borrowing money from the investor. For the privilege of borrowing the money, the issuer of the bond will make interest payments to the bond holder until the bond reaches the date of maturity. This allows for certain projects to be funded, even though the government doesn’t have the funding's for it. i.e.-schools, road improvements, and other public works projects.

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