Municipal bonds, or munis, are debt securities issued by U.S. states, local governments and other public entities. They can finance projects such as schools, roads or water systems. Interest on qualifying issues is exempt from regular federal income tax, so a muni with a lower quoted bond yield can pay more after tax than a comparable taxable bond. The taxable-equivalent yield is the pre-tax yield a taxable bond would need to match the exempt yield after tax. SEC Investor Bulletin — Municipal Bonds
What taxable yield matches a 3% muni?
Take two fictional one-year, noncallable bonds with comparable credit and liquidity. Each costs USD 1,000 at par, pays interest once at year-end and returns USD 1,000 at the same time. Assume full payment, no fees, and a stipulated effective federal marginal rate of 32% on the taxable bond's interest. The muni interest is fully exempt in the example, and state and local taxes and the alternative minimum tax have no effect.
At par, the 3.00% muni pays USD 30 of interest, all of which the investor keeps. The investor keeps 68 cents of each dollar of taxable interest. For a fully exempt yield and marginal rate on the comparator's interest, solve . MSRB — Understanding Taxable Municipal Bonds
A taxable bond quoted at 4.25% pays USD 42.50 before tax and leaves USD 28.90 after tax, or 2.89% on the purchase price. Hold that 4.25% quote fixed and vary the marginal rate. The two after-tax yields are equal at about 29.41%, where tax on the USD 42.50 coupon absorbs exactly the USD 12.50 difference in gross interest.
Fictional one-year bonds. The higher pre-tax quote produces the higher after-tax yield below the crossover, while the exempt muni yields more above it.
What the yield conversion leaves to the bond documents
Which cash flows are exempt? Some municipal bonds pay federally taxable interest. In September 2026, the City of New York reported selling both taxable and tax-exempt fixed-rate general obligation bonds in one transaction. An issue's official statement typically includes bond counsel's opinion on federal tax treatment. State and local treatment depends on the applicable law. Interest on some private activity bonds can enter the federal alternative minimum tax calculation. A sale can generate a taxable capital gain, and market discount on a secondary-market purchase can be taxable even when the coupon is exempt. If cash flows receive different tax treatment, apply tax to the affected amounts before calculating an after-tax yield. City of New York bond-sale announcement, MSRB — Tax Treatment, IRS Publication 550
What stands behind repayment? A general obligation bond generally carries the issuer's full faith and credit pledge. A revenue bond relies on specified revenues, such as water-system charges. Read the official statement for the actual pledge and payment terms. The tax conversion leaves credit risk and trading liquidity outside the calculation. SEC Investor Bulletin — Municipal Bonds, MSRB — Official Statements
Which payment schedule does the quote assume? Match maturity, credit quality and liquidity as closely as possible, and use the same yield measure and compounding convention. For a callable bond, check the call dates and redemption prices in the official statement. A yield to worst comparison can show how early redemption changes the quoted yield. The MSRB's EMMA database provides official statements and continuing disclosures. MSRB — Official Statements, SEC Investor Bulletin — Municipal Bonds