What it is:
A taxable bond is a bond whose interest payments are taxable at the federal, state and/or local level.
How it works/Example:
The purchaser of a taxable bond is, in effect, lending interest and principal payments to the purchaser. Issuers typically use proceeds to finance day-to-day operating activities or capital expenditures. The interest rate on taxable bonds can be fixed or variable.
There are many kinds of taxable bonds, and they may be purchased directly from the issuer at the time of issuance or (much more often) in the secondary through a broker/dealer. One of the most popular ways to invest in is by purchasing shares of a , which invests in a variety of within a certain sector or with a given characteristic.
Ratings agencies often evaluate and rate the creditworthiness of and their issuers. These ratings affect the price of the on the secondary market.
A taxable bond often has a lower yield than a with the same coupon rate (because the interest from municipal bonds is usually not taxable). For this reason, municipal-bond yields are frequently articulated in terms of the taxable interest rate equivalent to similar corporate-bond rates. (To learn how to determine the equivalent taxable interest rate for municipal bonds and taxable bonds, see our municipal bond entry.)