What are municipal bonds?
Municipal bonds are bonds issued or backed
by state and/or local governments to finance a variety of
public improvement projects. When you invest in municipal
bonds, you are loaning money to these issuers who in turn pay
you a regular interest income. Your investment may help fund
the building of a bridge that assists the flow of local
traffic, a new school, or other enhancements to your community.
Many investors see it as an incentive to buy municipal bonds,
because they like the feeling of knowing that they contributed
in some small way to the development of their community.
Municipal bonds are sometimes called " muni " for short.
Tax free investing in Municipal Bonds
When people talk about investing tax free,
they usually mean investing in municipal bonds. This is
because Municipal bonds offer income exempt from federal income
taxes, making them a powerful tool for maximizing your
after-tax earnings. You can buy new municipal bond
offering which tend to have better prices.
There are many factors to consider when
investing in municipal bonds such as municipal bond rates,
yields, maturity dates and types of municipal bonds
such as General
Obligation Bonds or Revenue Bonds. For investors looking
for shorter term investments than municipal bonds, there are
also municipal notes to
consider. Let’s look at municipal bonds in depth.
Three types of entities are legally
entitled to issue municipal bonds:
Territorial possessions of the US (US Virgin
Islands, Puerto Rico, Guam)
State governments; and
Legally constituted taxing authorities (county and
city governments, agencies created by these
governments and authorities that supervise ports
and mass transit systems, like port authorities and
Beyond their civic importance, however,
municipal bonds can stand on their own as effective investment
vehicles. Although municipal bond interest
rates are usually lower than corporate bond interest rates,
their safety and tax advantages sometimes surpass the benefits
of other investment vehicles. Because they can offer
substantial tax savings and a steady source of tax-free income,
many investors see municipal bonds as the foundation of their
portfolios, whatever their investment strategies.