The great thing about Municipal bonds is that they are exempt from federal taxation. They are also exempt from most state and local taxation particularly if you live in the state in which the bond is issued. Because of the favorable tax implications, municipal bonds tend to be popular with people who are in a higher income tax bracket. Investors should pay close attention to the equivalent yield when selecting bonds but this becomes increasingly important when selecting bonds for the individual in a high tax bracket.
This chart shows the Tax-free bonds and their corresponding taxable bond yields. For example: If an investor is in the 33% tax bracket and looks at a 5% muni-bond, he would need to find a taxable bond that exceeds 7.46% in order to choose the taxable bond over the tax free bond.