Fixed Income

• Taxable Fixed Income
  • Bond Market Monthly
• Municipal Bonds
  • The Basics
  • Commentary
  • Municipal Bond New Issues
  • Taxable Equivalent Yield Calculator
• Fixed Income High Net Worth
  • Getting Started
  • Program Components
• FDIC-Insured CDs
  • Features & Benefits
  • FDIC Insurance
  • CD Rates
• Auction Rate Securities

Municipal Bonds

The Basics

Municipal bonds are debt obligations issued by states, municipalities and various public authorities to raise money to build schools, highways, hospitals, and sewer systems, as well as many other projects for the public good. When you purchase a municipal bond, you are lending money to an issuer who promises to pay you a specified amount of interest (usually paid semiannually) and return the principal to you on a specific maturity date. The interest is usually exempt from federal income tax and state and local taxes, if issued in the state of the holder's residence.

Types of Municipal Bonds

Municipals can be broadly classified into two groups: general obligation and revenue bonds. The major distinction between them is how they are secured - that is, where the money will come from to pay back the principal and interest of the loan to the bondholder.

General Obligation Bonds. These bonds are issued by a governmental unit that has the power to levy taxes. They are secured by the issuer's promise to pay promptly the semi-annual interest expense and principal when due. General obligation bonds mandate the issuer to use its ability to levy taxes for the repayment of the bonds. They finance public improvement projects that benefit the entire community, like streets, free-access highways, water systems, schools and police and fire stations.

Revenue Bonds. These are usually issued to finance a project or purpose that will generate income that can be pledged for repayment of the bonds. Examples include water, sewer or electric power plants, airports, bridges, college dormitories and housing developments. The revenue generated by the project is used to pay the interest and principal of the bond.

Yield Comparison

Investors in the 25% bracket or above may be attracted to the tax exemption of municipal bonds. At a glance the 4.00% yield of the 10-year municipal bond may not seem too appealing when compared to a taxable investment yielding 3.00%. Yet the after-tax yield on a taxable investment is lower as the individual's tax bracket climbs higher. (Review the after-tax yields for each respective federal tax bracket.)

Because the municipal bond is exempt from federal taxes, the 4.00% yield is in fact more appealing than what appeared to be a higher-yielding taxable investment. The below chart does not take into account the exemption from state income tax which could make in-state municipal bonds even more appealing. Most states do not tax the income from in-state municipal bonds, while taxing those bonds issued in other states.

Start Investing

Helping you prepare for and participate in a world of financial opportunity includes giving you the information and education you need to make the most informed decisions possible regarding your investment planning. In addition, any fixed income portfolio should be structured to balance "reward" - after-tax yield - against certain risks and constraints that the investor might face. The best way to learn more about investing in municipal bonds is to discuss your specific questions and concerns with your Financial Advisor advisor.

For more information regarding municipal bonds, please visit the Resources section of our site.