More than 50,000 state and local governments and their agencies borrow money by issuing municipal bonds to build, repair, or improve schools, streets, highways, hospitals, sewer systems, and so on....

More than 50,000 state and local governments and their agencies borrow money by issuingmunicipal bonds to build, repair, or improve schools, streets, highways, hospitals, sewer systems, and so on. When the federal income tax law was adopted in 1913, interest on municipal bonds was excluded from federal taxation. As a result, municipal bond investors are willing to accept lower yields than those they can obtain from taxable bonds.

As part of your portfolio, you are considering investing $60,000 in bonds. You have the choice of investing in tax-exempt municipal bonds yielding 3.75% or corporate bonds yielding 5% in taxable interest income.