Tax-Exempt Commercial Paper

Finance allah shmoop who buys communi bonds who buys them

rich people or rather people earning enough active income such

that their marginal tax rates are very high Munich bonds

are tax free so in practice they tend to offer

lower net yields than taxable corporate bonds Okay so what's

the math here Well if your ah high earner i'ii

europe bo tox correction surgeon or an ambulance chasing attorney

from new york Or an all star nfl linebacker with

no felony drug or spousal battery convictions Yeah a few

of those actually do exist Well then it's likely that

you pay the highest marginal tax rates They seem to

change every election cycle so will generalize here so we

don't have to redo this video every two to four

years At the highest rates you'll pay about thirty five

percent federal tax and twelve ish percent state tax and

usually an override for some other political initiative like obama

care or the wall fund or the no child left

behind fund at the zune fund Beyond those total them

up And let's say you pay fifty percent marginal tax

on your last in a few million bucks in earnings

and let's also say for illustrative purposes here assumed that

the bonds we are comparing our of equivalent risk and

duration compared with these immunities right Let's say so They're

both a rated and they come due in on a

half a dozen years Well the corporate bonds than yield

us a seven point two percent and the parallel nooni

bond yields four percent So then which bond has the

higher value to its high tax paying owner Well if

you're paying fifty percent tax on the seven point two

percent corporate bond than you the nun convicted linebacker pay

net after tax fifty percent of seven point two percent

interest or three point six percent The munich carries no

tax so it's gross is net meaning the four percent

yield of them unibond produces point four percent a year

Better yield after taxes then does the corporate bond So

what if you were a sir school teacher not rich

paying this a twenty percent marginal tax instead of fifty

Well then you'd go for the corporate bond It yields

gross seven point two percent But after your twenty percent

tax the yield after tax on that corporate to you

mrs whitehead homeroom number fourteen teacher of health and sex

ed to simply horny teams Yes your yield then is

point eight times seven point two or five point seven

six percent way higher than the muniz yield of four

percent The differences here in yield from a corporate versus

immune e maybe don't seem like a lot but over

time they really add up So once you make your

first one hundred million or so don't forget teo you

know come back and watch this video It'll be here 00:02:41.48 --> [endTime] for you