Whats the difference in benefits between tax free zero coupon bonds and taxable zero coupon bonds?

Is there any benefit to having one over the other? Does one get you more money?Whats the difference in benefits between tax free zero coupon bonds and taxable zero coupon bonds?
In theory, the tax free bonds will provide you with more money because you don't have to pay taxes on the capital gain. However, most of the time a tax free bond will have a lower yield to maturity to make up for the tax relief.


In order to decide which of two bonds is the best choice you must take the taxes you will have to pay out of any gains on the taxable bond and compare that to the gains you make on the tax free bond.


I know this sounds very generalized, but it is easier to explain with numbers to work with. Here is an example:





If you can buy a taxable bond for $100 par value and it pays $120 at maturity, that is a 20% gain. Let's say your tax rate is 24%. Once taxes are subtracted you have a 15.2% gain.


Compare this to a tax free bond for $100 par value that pays $115 at maturity. That is a gain of 15% which is less than that of the taxable bond yield.





You can work this problem with any amounts in order to pick the best alternative.