2.9 Municipal Securities
Municipal bonds offer federal tax-exempt income. Comparing GO vs Revenue bonds and calculating Tax-Equivalent Yield (TEY) are core test concepts.
Key FINRA Exam Takeaways
- Issued by states, cities, counties; interest is 100% EXEMPT from federal income taxes.
- General Obligation (GO) Bonds: Backed by full taxing power (ad valorem property taxes); requires voter approval.
- Revenue Bonds: Backed by specific user fees (toll roads, airports); self-supporting, no voter referendum needed.
- Tax-Equivalent Yield (TEY) = Municipal Yield ÷ (1 - Tax Rate).
- Suitability: Best for high-income investors in high tax brackets; NEVER suitable for IRAs or 401(k) accounts.
Knowledge Checkpoint • Section 2.9
An investor in the 30% federal income tax bracket earns a 4.2% yield on a municipal bond. What is the tax-equivalent yield (TEY) of this bond?