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alternatives to consider. However, all of these come with their own unique risks that should be examined carefully.

Zero coupon bonds are bonds that do not pay interest year to year. Rather, they are issued at a deep-discount to what they will eventually mature at. The difference between your purchase price and the maturity value is your investment return. These generally offer a higher rate of return than coupon bonds, but also experience much more volatility in their price right up until they mature.

Taxable municipal bonds are bonds that do not receive the Federal exemption from taxation because they fund certain activities like sports stadiums. They often offer taxable yields slight higher than Treasury bonds, and are the once exception to the rule against using muni's in a tax-favored account.

AMT bonds are bonds that receive the Federal tax exemption, but whose interest might be subject to the Alternative Minimum Tax. Since they offer a higher yield then non-AMT bonds, they are a great option to consider for someone who is very sure they will not be subject to the Federal Alternative Minimum Tax.


Before you start building your municipal bond portfolio, here are some other resources to take a look at:

Muni Bond 101 on E-Personal Finance
http://www.e-personalfi nance.com/article/Municipal-Bo nds-101.html

Tax-Equivalent Yield Calculator
http://www.investing inbonds.com/calcs/taxcalculato r/taxcalcform.aspx

Learn more about this author, Ken Clark.
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