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income from investing in municipal bonds is generally exempt from federal and state taxes. do you...

income from investing in municipal bonds is generally exempt from federal and state taxes. do you think this incentivizes people in high or lower tax brackets to buy them? why?
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Answer #1

Municipal bonds are usually tax free bonds issued by bond issuers to raise capital from public in return for periodic payments in the form of interest. These are tax exempt from Federal taxes, and mostly tex free at the state level as well, particularly when the bond's investor lives in the state in which the bond was issued.

As a result, high-income individuals are more motivated than low-income individuals and prefer to invest in municipal bonds due to the tax exempt nature as they find a better after-tax return than with other investments having fixed income feature that are fully taxable at all levels, for example: certificate of deposit, corporate bonds etc.

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