Question

Suppose the US government unexpectedly eliminates the tax-free status on Muni Bonds (ie from now on income from Muni bonds will be subject to same taxes as other bonds). When this happens, would you rather be a holder of a bond issued by the St. Lawrence County Industrial Development Agency (the SLC IDA issues Muni bonds) or a Treasury bond? If holding a Muni, would you prefer long or short (assume any change in interest rates is the same for all maturities)? Illustrate and explain your answer.

Answer 1

Muni bonds are the municipal bonds. Such bonds are backed by local government or one of their agencies.

Treasury bonds are the bonds which are issued by the federal government of the United States.

Compared to the muni bonds, treasury bonds are safer option to invest in. The reason for this is that the treasury bonds are backed by credit of the federal government. So they are totally risk free. Although muni bonds also have very little risk involved but treasury bonds are totally risk free. Hence they are a better option.