The municipal bond market is one of the world's largest and most remarkable securities markets - in order to list them all, it would take 90 pages of your newspaper! Almost two trillion dollars worth of municipal bonds are currently in the hands of investors. That is because municipal bonds are a necessary investment tool for today's tax-conscious investors. Municipal bonds offer predictable amount of attractive current income, potential tax benefits, a high degree of safety, a wide variety of choice and marketability.
Municipal bonds are debt obligations issued by states, cities, counties, and other governmental entities in order to raise money for projects such as schools, bridges, hospitals, sewer systems, and other projects. Because most of these projects are beneficial to the public good, they are usually tax exempt, or tax free. But there are other examples, such as the building of sports facilities that do not provide tax benefits. One normally associates municipal bonds with the possible tax benefits they provide.
When an investor purchases a municipal bond, their income(s) received are exempt from federal income taxes - and in some cases, state and local taxes, as well. One of the best ways to appreciate the tax-exempt advantage of a municipal security is to compare it to a comparable taxable investment. Here is a modest example of the benefit provided from taxable equivalent yields. A more detailed table is attached on page 5.
An estimated 5 million households own municipal bonds in some form - either through direct ownership of individual bonds or through investments in institutional portfolios, including mutual funds, unit investment trusts, and back trust accounts. Commercial banks and insurance companies are also major holders of these municipal bonds.
When you invest in any bond, your primary concern should be the issuer's ability to meet its financial obligations. Issuers of municipal bonds have an outstanding record of meeting interest and principal payments in a timely manner. Another way to evaluate an issuer it to examine its credit rating; many bonds are graded by ratings agencies such as Moody's, Standard & Poor's, and Fitch. There are many other ratings, but what's important is that ratings are an indication of the issuer's ability to repay the bond's face value at maturity. 'Triple A' is usually regarded as the highest quality bond.
Municipal bonds are usually issued in $1,000 and $5,000 face-value denominations, or multiples of $5,000. They mature anywhere from one to fifty years. Like other bonds, they can be bought at a discount. For example, an investor could purchase a $5,000 bond for $4,000. Interest payments are paid semiannually.
Municipal bonds are bough and sold in the over-the-counter market, rather than on an organized exchange. There are approximately 2,700 securities dealers across the US that are registered with the Municipal Securities Rulemaking Board, which allows them to sell municipal bonds.