Municipal Bonds - Understanding Tax Free Municipal Bonds

Municipal bonds and notes are issued by state andbond and securing the bond investors with school or
local governments. These municipalities include:property tax revenue is considered a General
StatesObligation bond as well. Since taxes are the most
Counties and Citiessecure source for money now and in the future, some
Towns and Schoolsinvestors prefer them over most revenue
Municipal AuthoritiesInterest payments on traditionalissues.Revenue BondsIssues that rely on the revenue
municipal bonds are exempt from federal tax. Theyproducing ability of a facility or from the issuer through
are subject to state and local tax.Tax Free YieldWhenother means are Revenue Bonds. There are several
looking to purchase muni bonds, a person shouldtypes of issuers. These would include:
understand how tax exempt yields work. The higherTransportation - Bridges, Tolls, and Airports would be
the tax bracket, the higher the yield. If an investor isgood examples
considering buying a 6% municipal bond at par andHealth care - City or county hospitals
they are in the 28% tax bracket, the tax free yieldUtility Companies - Electric or water companies could
would be higher than 6%. The formula is: Municipalassess usage increases to raise money.
stated rate or coupon divided by 100 minus the taxIndustrial - Some municipal issuers will work with
bracket.The calculation would break down like this:6%private companies and use the company's lease
divided by 72 (100-28), which equals 8.33%. Thispayments to the city as a revenue source for bond
means that to achieve a better return than this 6%issues.
coupon bond, you would need equal to or better thanTriple Tax Free Municipal BondsInvestors who buy
8.33% in a taxable investment. A lower tax bracketmunicipal securities issued within their own state are
would show a lower tax free yield.Type of Municipalexempt from federal, state and local taxation. An
IssuesThere are two main types or ways ainvestor in California should consider buying California
municipality can guarantee or back it's bond. One waymunicipal bonds above issues from outside the state.
is through the taxing power of the municipality. ThisRetail or 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 usesnormally buy from all over the country.Municipal bonds
specific revenue sources to secure the issue.Generalshould be a part of most investor portfolios. They are
Obligation BondsThese are the most common andalso a way of supporting your local area.For more
normally the better rated issues. A state raising moneyinformation: Muni Bonds at Brokerjobs.comNick Hunter
and backing the bond issue with higher income or salesis the President of American Investment Training, AIT
tax would be considered a G.O. Bond. A school districtand the owner of - A financial education and career
rasing money through a broker dealer on a municipalwebsite.