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Generally, municipal bonds are considered safer than corporate bonds because a local government is far less likely to go bankrupt than a corporation-however, it has happened in the past, so be aware of the possibility. Because of this safety and the tax benefits, municipal bonds generally have a lower yield than corporate bonds. In order to
evaluate the merits of a tax-free bond, you will need to calculate the tax-equivalent yield on the bond. This is the amount of interest a tax-free bond would have to provide to create the same return as a taxable bond. Of course, this calculation will depend on the tax bracket of the individual, but it is an effective way to compare the merits of taxable and tax-free bonds. Investors should also be aware that some municipal bonds are subject to the Alternative Minimum Tax. The bond type which is most often subject to the AMT is one which involves a private and publicpartnership for something like a sports stadium.
These bonds are unsecured municipal bonds that are simply backed by the full faith and credit of the municipality. Generally, these bonds have maturities of at least 10 years and are paid off with funds from taxes or other fees.
Revenue Bonds
These bonds are used to fund projects that will eventually create revenue directly, such as a toll road or lease payments for a new building. The revenues from the projects are used to pay off the bonds. An interesting twist is that in some cases the issuer is not obligated to pay interest unless a certain amount of revenue is generated.
If a municipal bond makes sense for you, you will need to work through a broker in order to purchase them. This is another drawback as you will be forced to pay a commission to the broker before you finally get your hands on the bond. When comparing
these bonds to others, remember to take this additional cost into account. In addition, municipal bonds usually come in $5,000 par values and usually require a minimum investment of $25,000 in order to get the best price. So, if you don't have this amount of money to invest, you may want to look to municipal bond mutual funds to gainaccess to municipal bonds .
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