Why are Tax-exempt Bonds Preferred by Wealthy Investors?
Municipal bonds, because of their tax-exempt nature, are preferred by investors from all spectra but they are especially attractive to investors falling in higher tax brackets. Let us take an example to see why this is the case. Imagine that a regular bond yields $100 as interest income in an year. A person in a 10% tax bracket will be paying 10% of his adjusted gross income as tax, so his net income from the bond will be $100 minus $10, which is $90. For a person in a higher tax bracket, say 28%, the net income from the regular bond will only be $100 minus $28, which is $72. Since both individuals do not pay tax on a tax-exempt bond, they both the get $100 as income, but the person in the higher income tax bracket would benefit more since he would be paying a higher tax in an alternate investment.
