Editing Municipal bond (section)

===Comparison to taxable bonds===
Comparing the [[Yield (finance)|yield]] on a municipal bond to that of a corporate or U.S. Treasury bond can be misleading, because of differing tax treatment of the income from the two types of securities. For that reason, investors use the concept of ''taxable equivalent yield'' to compare municipal and corporate or Treasury bonds. The taxable equivalent yield on a municipal bond is calculated as follows. Where ''r''<sub>''m''</sub> = interest rate of municipal bond, ''r''<sub>''c''</sub> = interest rate of comparable corporate bond and ''t'' = investor's tax bracket (also known as marginal tax rate):<ref>{{cite book |last1=Thau |first1=Annette |title=The Bond Book |date=2001 |publisher=McGraw-Hill |location=New York |isbn=0-07-135862-5 |page=129 |edition=Second}}</ref> 
:<math>r_c = \frac{r_m}{( 1 - t )} </math>

For example, assume an investor in the 38% tax bracket is offered a municipal bond that has a tax-exempt yield of 1.0%. Using the formula above, the municipal bond's taxable equivalent yield is 1.6% (0.01/(1-0.38) = 0.016) - a figure which can be fairly compared to yields on taxable investments such as corporate or U.S. Treasury bonds for decision making purposes.<ref>{{cite book |title=Feldstein and Fabozzi op cit |page=181}}</ref>

Typically, investors in the highest tax brackets benefit from buying tax-exempt municipal bonds instead of taxable corporate bonds, but those in the lowest tax brackets may be better off buying corporate bonds and paying the taxes.<ref>{{cite book |title=Thau op cit p. 131}}</ref> Investors in higher tax brackets may [[arbitrage]] municipal bonds against corporate bonds using a strategy called [[municipal bond arbitrage]].