Municipal Bonds - why to invest in them.

Essay by d3v14ntUniversity, Bachelor'sA+, November 2003

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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...