Municipal tax-equivalent yields are relatively attractive. The tax-equivalent yield in municipal bonds.
Municipal bonds generate tax-free income and therefore pay lower interest rates than taxable bonds. Investors who anticipate a significant drop in their marginal income-tax rate may be better served by the higher yield available from taxable bonds.
Municipal bonds versus corporate bonds: Municipal bonds differ from corporate bonds in the tax treatment of the interest they pay, and they also have lower default rates. This is why municipal bonds generally pay lower yields than similar corporate bonds.
Investors favor municipal bonds, or "munis," for two main reasons. They are exempt from federal taxes, and they are relatively low-risk investments. While stable, income-producing bonds warrant a position in any well-diversified portfolio, there are inherent drawbacks to owning munis.
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