"First of all, there is a great deal of money seeking out short-term tax-free yields," he said.

This popularity itself fueled more sales because when demand stays ahead of supply, prices remain high and investors reap capital gains in addition to tax-free yield.

Last week, they offered an average tax-free yield of 4.44 percent.

The closed-end municipal bond fund industry is a sedate business - a haven for investors seeking high tax-free yields.

And you get a tax-free yield of around 6 percent.

To do that, divide the tax-free yield by the inverse of your tax rate.

And those who pay premiums get a lower tax-free yield than investors who do not pay premiums.

To figure out if tax-free funds make more sense for you, subtract your tax rate from 1 and then divide the difference into the tax-free yield.

To calculate the "taxable equivalent yield" of a muni bond fund, divide the tax-free yield by 100 minus your tax rate.

But investors who do - after checking the spread between taxable and tax-free yields - will find that the strategy hinges greatly on the bonds' maturities.