A bond that is fully exempted from taxation on its interest payment. The interest income on this bond, generally issued by government entities and projects, takes the form of a fixed coupon rate, and will not be included in an investor’s taxable income. However, no tax deduction will result from investment in tax-free bonds. The proceeds of issuance are typically invested in infrastructure projects. The interest (coupon) rates of tax-free bonds are pegged to the prevailing rates of government securities. Therefore, these bonds become more attractive in an environment of high interest rates.
Tax-free bonds carry a long-term maturity of 10, 15 or 20 years.
