Tax Free Bond

The best example of comprehensive tax-free bonds is the Savings Bonds issued by the US Treasury Department. These bonds are exempt from all state and local taxes, like most other US Treasury securities and they are the only one of their kind for which all federal taxes are deferred until the bond is redeemed.
These deferments mean that despite interest accruals, taxes would not be due until the bond matures. Besides, if the interest earnings at redemption go into the coverage of tuition expenses for the bondholder, a spouse or a dependent during the same year, the interest earned would be exempt from federal taxes. The best tax-free bond offer from the US Treasury Department is the Series I.

The Series I pay a fixed base percentage of the real interest that is determined at the time of purchase and adjusted for inflation on a half yearly basis. The interest on the Series I is two dimensional with the interest being set at purchase for the duration of the bond, on one hand, and adjusted every six months according to the level of consumer inflation, on the other hand. Eventually the two interest accruals are combined by a special formula derived at by the issuing authority, the U.S. Treasury Department that gives the composite rate that investors receive on their bond.

Municipal bonds, otherwise called ‘Munis’ are another form of tax-free debt securities that are issued by many cities across the United States. ‘Munis’ enjoy special tax-free status and as a result the investor pays no federal, state, and, local taxes (in certain cases) on the interest accruals. However there is a profitability trade-off with investment in ‘Munis’ as they usually come with a lower interest rate to make way for the tax exemptions. The different types of ‘Munis’ are:
General Obligation Bonds
These bonds have the full faith and credit (The taxing power of the municipality) of the issuing authority.
Revenue Bonds
These bonds are backed by the revenues of a specific project, authority or agency, or the funds of a specific tax. The worth of these bonds is proportionate to the worth of the projects they support and they are not backed by the taxing power of the issuing authority or municipality.
Industrial Development Bonds
These bonds finance industrial infrastructure leased to businesses. Occasionally they provide cost beneficial finance to projects located in the geographical area of the issuer. For the discernable investor who is caught between investing in a tax-free and a regular bond the solution lies in converting the regular bond's interest rate to its equivalent post tax rate and check the comparison. In most cases one of them would have a higher rate but it is for the investor to finally decide where he wants to put his money.