What Is a Bond? Treasuries, Munis, Corporates — and How Each Is Taxed
By TopHolding Editorial · Tuesday, June 16, 2026 at 3:17 PM
A bond is a loan you make to a government or company in exchange for interest payments and your money back at maturity. Here is how the major types differ — and the tax rules that decide which bond belongs in which account.
A bond is a loan with a coupon and a maturity date. The type — Treasury, muni, corporate, TIPS, I bond — quietly decides what return you keep after taxes.
What a bond actually is
A bond is a loan. When you buy a bond you are lending money to a government or company in exchange for regular interest payments — the coupon — and the return of your principal on a specific future date.
A $1,000 bond paying a 5% coupon for 10 years sends you $50 a year for a decade and then returns the $1,000. Yield, duration, credit risk, and tax treatment are all detail layered on top of that simple structure.
Treasuries: short, mid, and long
Treasury bills mature in a year or less and are sold at a discount to face value. Treasury notes mature in 2 to 10 years and pay a semiannual coupon — the 10-year note is the benchmark behind mortgage rates and most asset valuations. Treasury bonds run 20 or 30 years with the highest Treasury yields and the most interest-rate risk.
The tax kicker: Treasury interest is federally taxable but exempt from state and local income tax. In a high-tax state, a 4.5% Treasury can beat a 4.7% CD on an after-tax basis.
Munis, corporates, TIPS, I bonds
Municipal bonds are exempt from federal tax (and usually in-state tax for residents) — a 3.5% muni is equivalent to roughly 5.8% taxable for a 37%-bracket investor. Corporate bond interest is fully taxable and belongs in IRAs. TIPS adjust principal with CPI but owe phantom annual tax on the inflation accrual — also better in tax-deferred accounts.
Series I Savings Bonds — bought via TreasuryDirect, capped at $10,000 a year — are state-tax-free, federally tax-deferred, and tied to inflation. They cannot be redeemed in the first 12 months, and exiting before five years forfeits the last three months of interest.
Why duration is the whole game
Bond prices move inversely to interest rates. Duration measures how much: a duration-7 fund falls about 7% if rates rise one full point. The 2022 bond crash — total bond market funds down roughly 13% — was a duration story, not a credit story.
Short-term funds run a duration of 1 to 3, total-bond-market funds sit at 6 to 7, and long Treasuries can exceed 15. Match duration to your time horizon, not to the headline yield.
Bottom line for investors
Match the bond to the account — munis in taxable, corporates and TIPS in tax-deferred, Treasuries with a tilt to taxable in high-tax states. A low-cost bond index fund like BND or AGG, or a simple Treasury ladder via TreasuryDirect, covers most investors.