| Municipal bonds and notes are issued by state and | | | | tax would be considered a G.O. Bond. A school |
| local governments. These municipalities include: | | | | district rasing money through a broker dealer on a |
| - States | | | | municipal bond and securing the bond investors |
| - Counties and Cities | | | | with school or property tax revenue is considered |
| - Towns and Schools | | | | a General Obligation bond as well. Since taxes are |
| - Municipal Authorities | | | | the most secure source for money now and in |
| Interest payments on traditional municipal bonds | | | | the future, some investors prefer them over |
| are exempt from federal tax. They are subject | | | | most revenue issues. |
| to state and local tax. | | | | Revenue Bonds |
| Tax Free Yield | | | | Issues that rely on the revenue producing ability |
| When looking to purchase muni bonds, a person | | | | of a facility or from the issuer through other |
| should understand how tax exempt yields work. | | | | means are Revenue Bonds. There are several |
| The higher the tax bracket, the higher the yield. If | | | | types of issuers. These would include: |
| an investor is considering buying a 6% municipal | | | | - Transportation - Bridges, Tolls, and Airports |
| bond at par and they are in the 28% tax | | | | would be good examples |
| bracket, the tax free yield would be higher than | | | | - Health care - City or county hospitals |
| 6%. The formula is: Municipal stated rate or | | | | - Utility Companies - Electric or water companies |
| coupon divided by 100 minus the tax bracket. | | | | could assess usage increases to raise money. |
| The calculation would break down like this: | | | | - Industrial - Some municipal issuers will work with |
| 6% divided by 72 (100-28), which equals 8.33%. | | | | private companies and use the company's lease |
| This means that to achieve a better return than | | | | payments to the city as a revenue source for |
| this 6% coupon bond, you would need equal to or | | | | bond issues. |
| better than 8.33% in a taxable investment. A | | | | Triple Tax Free Municipal Bonds |
| lower tax bracket would show a lower tax free | | | | Investors who buy municipal securities issued |
| yield. | | | | within their own state are exempt from federal, |
| Type of Municipal Issues | | | | state and local taxation. An investor in California |
| There are two main types or ways a municipality | | | | should consider buying California municipal bonds |
| can guarantee or back it's bond. One way is | | | | above issues from outside the state. Retail or |
| through the taxing power of the municipality. This | | | | individual investors should only buy from within |
| would be called a General Obligation Bond or G.O. | | | | their state because of this. Larger institutions will |
| Bond. Another is called a Revenue Bond, which | | | | normally buy from all over the country. |
| uses specific revenue sources to secure the issue. | | | | Municipal bonds should be a part of most investor |
| General Obligation Bonds | | | | portfolios. They are also a way of supporting your |
| These are the most common and normally the | | | | local area. |
| better rated issues. A state raising money and | | | | For more information: Muni Bonds at Brokerjobs. |
| backing the bond issue with higher income or sales | | | | |