MUNICIPAL BONDS

An important advantage to investors

Municipal bonds (or investment products that invest in municipal bonds) provide an important advantage to investors: The interest they generate is almost always exempt from federal income tax. This may be of special interest to investors in high tax brackets. The higher the bracket, the greater the potential advantage – a benefit that may give municipal bonds an edge over taxable investments.

Consider the hypothetical case of an investor in a 28% federal tax bracket who has $100,000 to invest — a taxable bond yielding 4% provides an investor with $2,880 in after-tax interest income, but a municipal (tax-exempt) bond yielding 4% provides an investor with $4,000 in after-tax interest income1 — a difference of $1,120.
 

The municipal advantage

Our compensation and comparison illustrations can give you a sharper understanding of the municipal bond edge over taxable investments.

 

To compensate this investor for this “advantage,” a taxable investment would have to yield 5.56%.


 

 

Considering their relative tax advantages, municipal bonds should continue to be a valuable vehicle for income. Currently, municipal yields are well ahead of comparable Treasuries, and they're keeping pace with their corporate counterparts, making them even more attractive on an after-tax basis.2

Source: Barclays, as of June 30, 2015, based on yield to worst. The taxable equivalent yield (TEY) is based on the 43.4% income tax bracket. TEY may be higher or lower, depending on an individual’s tax bracket.

 

Avoid road bumps. Put active management experts behind the wheel.

Active management can help investors avoid areas at risk of correction or credit downgrades, in favor of areas that are more fundamentally sound and could potentially receive credit upgrades.

 

Improving fundamentals

A sustained economic upswing could further strengthen municipalities’ balance sheets.

Lack of major defaults

Despite the headlines, municipal defaults remain low.

Fiscal responsibility

States continue to take meaningful action to get their financial houses in order, though challenges remain at state and local levels.

 

Want long-term impact on your income and portfolio? Explore the benefits of municipal bonds and see how they might support your personal investments needs.


Active management does not ensure gains or protect against market declines.

Please note that the analysis presented here does not account for state or local taxes, if applicable. Consult your tax advisor about your particular situation.

Certain investors may be subject to state or local income taxation. Income from “private activity” municipal bonds may be subject to federal, state or local Alternative Minimum Tax (AMT). Capital gains, if any, are fully taxable.

Yield to worst is calculated based on assumption that prepayment occurs if the bond has call or put provisions and the issuer can offer a lower coupon rate based on current market rates. If market rates are higher than the current yield of a bond, the yield to worst calculation will assume no prepayments are made, and yield to worst will equal the yield to maturity. The yield to worst will be the lowest of yield to maturity or yield to call (if the bond has prepayment provisions); yield to worst may be the same as yield to maturity but never higher.
 


The Municipal Advantage - How Much is it Worth to You?

A brochure indicating the important advantages of municipal bonds to investors. Includes tax-exempt bond yields compared to taxable equivalent yields.



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The Municipal Advantage - How Much is it Worth to You?

A brochure indicating the important advantages of municipal bonds to investors. Includes tax-exempt bond yields compared to taxable equivalent yields.

IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Yields and dividends represent past performance and there is no guarantee they will continue to be paid. 

U.S. Treasuries are direct debt obligations issued and backed by the full faith and credit of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity.  

Legg Mason, Inc., its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the ?promotion or marketing? of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer?s particular circumstances from an independent tax advisor.

Carefully consider a fund’s investment objectives, risks, charges and expenses before investing. Please view the prospectus or summary prospectus, for this and other information. Read it carefully.