What Are Municipal Bonds

An Investor's Guide to MUNICIPAL BONDS
Investing to maximize after-tax income.

Understanding Yields; How Safe Are Municipal Bonds?; Understanding Market Risk; Understanding Calls; Gains and Losses; Bonds With Special Investment Features; Types of Tax-Exempt Municipal Bonds; Taxable Municipal Bonds; Other Basic Facts; The Tax-Exempt Municipal Bond Market--How Big and Who Buys?; Tax-Exempt/
Taxable Yield Equivalents
: State Taxation of Municipal Bonds for Individuals
: State Taxation of Municipal Bonds for Corporations
: Glossary

WHAT ARE MUNICIPAL BONDS?

Municipal bonds are debt obligations issued by states, cities, counties, and other governmental entities to raise money to build schools, highways, hospitals, and sewer systems, as well as many other projects for the public good.

When you purchase a municipal bond, you are lending money to an issuer who promises to pay you a specified amount of interest (usually paid semiannually) and return the principal to you on a specific maturity date.

Not all municipal bonds offer income exempt from both federal and state taxes. There is an entirely separate market of municipal issues that are taxable at the federal level, but still offer a state--and often local--tax exemption on interest paid to residents of the state of issuance. Most of this booklet refers to munis which are free of federal taxes. See this section for more about taxable municipal bonds.

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Municipal bonds, like other fixed income instruments, are subject to changes in market price based upon factors including the level of interest rates, market conditions and credit quality of the issuer.

If you wish to sell your bonds before they reach maturity, you will
receive the market price at that time, which may be more or less than the price you originally paid. Yields will fluctuate if sold prior to maturity.

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©1997-2001. All reproduction and other rights reserved.
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All information and opinions contained in this publication were produced by The Bond Market Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, The Bond Market Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.

An Investor's Guide to MUNICIPAL BONDS Investing to maximize after-tax income.

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