by E.M.Robinson

Created on: January 12, 2008

You may have heard that municipal bonds are good investments. The sale of municipal bonds make it possible for a city, county, or state governments to issue municipal bonds for the building of schools, highways, hospitals, and other such projects for their locality.

Municipal bonds look good to the investor because these municipal bonds are tax exempt when it comes to federal taxes and can be free of state taxes if bought in the investor's own state (But don't miss Tip #2 Below!). Such municipal bonds may even be tax exempt when it comes to personal property tax. Certainly, if you live in a high tax state, such an investment will be particularly advantageous.

In addition to the potential interest income, investors may be drawn to municipal bonds because of the relative safety of this kind of investment. Interestingly, investors may also be interested in the projects being financed for personal reasons or because those improved roads or schools may indirectly benefit their other business interests.

Does this description sound like you and your current financial interests? Certainly, municipal bonds are worth looking into for the tax advantages that put money in your pocket, the safety of the investment, and your possible interest in the state or municipal (city, county) projects that can be completed due to the sale of municipal bonds.

You need to know more:

There are two categories of municipal bonds:
1)General Obligation bonds
2)Revenue Bonds.

Their difference centers on the collateral to back them.
General Obligation bonds, with the appealing nickname of GO Bonds, are backed by the fact that city, county, or state has the advantage of being able to raise revenue through taxes.
Revenue municipal bonds are offered by an entity at the city, county, or state level. A utility company such as a water company is a good example of such a revenue municipal bond. That utility, that business, has an obligation to pay the interest and does so from the revenues that come in from the business. In this case, the income is generated as customers pay their water bills. The bond holders are paid from this revenue.

Do you wonder how these tax free municipal bonds compare to other bond investments you may be looking at? There is a way to compare them. You will want to get the greatest after-tax return. The taxable equivalent yield formula will help you see which may be the best for you.
To calculate this information, you will need to know about Yield and will need to know your tax bracket

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