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There is much uncertainty in the air these days about the state of the U.S. economy. Whenever there is fear about the direction of the U.S. stock market, oftentimes, investors shy away from equities, (stocks,) and a flight to quality, to the bond market takes place. Generally, investors choose U.S. Governments bonds, but there are other bonds out there that bear looking into at any point in our time, as a portion of a balanced portfolio. Municipal Bonds are one such bond category.

When you buy a stock, you are buying a "share" of the underlying company. Bonds are debt instruments. Therefore, you are actually loaning the issuing bond agency money needed for whatever project they need to complete. In the case of municipal bonds, you are loaning money to the underlying city or county so that roads can be built, for example, or for the construction of a new fire or police station, schools or any part of the infrastructure. Municipal bonds are also issued by a developer who needs the money to provide streets, curbs or gutters to complete his or her new development.

Muni bonds can be issued for almost any municipal project. How, then, do they differ from, say, corporate bonds or U.S. Government bonds? Here is where we need to differentiate among bond categories and take a look at what makes Municipal Bonds attractive to investors.

First and foremost, most muni bonds are generally "double tax-free." This means that the INCOME earned from a muni bond is tax-free to the investor from his/her state and federal Income Taxes. There are some exceptions, however, so one needs to be sure if the muni bond you are considering is exempt from both state and federal taxes. Most individual muni bond investors buy the bonds for the tax-free income. If, however, you sell it before maturity for more than you paid for the bond, the capitol gain is NOT tax-free.

Municipal bonds are appropriate only for investors in high tax brackets. If you are in a low tax bracket, you can generate more income from a taxable bond. The tax-free status of muni bonds allows higher net-worth individuals to accept a lower yield because their tax bite lowers the income so substantially on a taxable bond, that a muni bond with a lower yield works out better for them on the bottom line.

If a bond pays a 5% yield, the bond-holder will receive $500 on a $10,000.00 investment each year. Generally, the payments are paid in two installments, one payment of $250 each six months on this particular investment. Muni

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