Why is it better for me to own municipals when municipal bond rates are lower than taxable bond (Treasury bonds, corporate bonds) rates?
The following example illustrates: If a New York state resident were to purchase $10,000 worth of a 7% corporate bond and was in the 6% state tax bracket and the 28% Federal tax bracket, he would have to pay 32.93% (the Combined Effective Rate), or $238, to state and federal tax authorities. This would leave him with an after-tax yield of 4.62%. Thus, a 5% New York municipal bond that is both free of federal and state taxes and yielding more than 4.62% would be an attractive alternative.
