Municipal Bond Overview

Municipal bonds, affectionately known as munis, are one of the best instruments ever created for investors. They are the be-all, end-all, civic-minded type of investment Your hard-earned dollars go to building government and public structures and services, like highways, bridges, sewage treatment plants, airports, and hospitals. 

And besides doing your public-service part, the bond s interest is federal and sometimes state tax-free to encourage investment in the bonds financing these projects. What more could you ask for The federal and state governments don t tax each other s bonds, so you don t have to pay federal taxes on the interest you earn on municipal bonds. And, in many states, the income is also exempt from state taxes. 

As long as the Internal Revenue Service exists, investors will be clamoring for an instrument that is tax-exempt. This constant demand means prices tend to remain steadier, municipal bonds tend to have more subdued highs and lows than other 

keep in mind that because of municipal bonds tax-exempt quality, local governments issue bonds with lower yields, knowing that they can still attract interested investors. You generally don t shop in the municipal market based solely on yield, you look for credit quality, maturity, and other factors. 

As an illustration, here is how you calculate the taxable equivalent yield (TEY) for municipal bonds. Let s assume a federal tax rate of 25 percent and a tax-exempt yield of 5.45 percent. First find the reciprocal of your tax rate  

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This chapter overviews the leading online brokerages available to investors most notably MuniDirect and Public Debt Online. One sells municipal bonds, and the other, U.S. Treasuries (and even savings bonds). Since these categories are the two that individual investors concentrate on most when contemplating purchasing bonds directly for their portfolios, I feel that they would be of extreme value for you to consider. 

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