This page provides nformation about investment bonds, municiple bonds, muni bonds and tax free bonds.
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.
Tax Free Bonds are exempt municipal bonds are among the most popular types of investments available today, and with good reason. They offer a wide range of benefits, including:
Attractive current income free from federal and, in some
cases, state and local taxes;
High degree of safety with regard to payment of interest
and repayment of principal;
Predictable stream of income;
Wide range of choices to fit in with your investment objectives
with regard to investment quality, maturity, choice of
issuer, type of bond and geographical location; and
Marketability in the event you must sell before maturity.
WHAT ARE TIPS BONDS?
Treasury Inflation-Protected Securities, mostly called TIPS, are a special type of Treasury security. When you own bonds, you get interest payments every 6 months, with a payment of principal when the security matures. The change is this: Interest and redemption payments for bonds are tied to inflation.
Bonds pay a fixed rate of interest. But this fixed rate of interest is applied not to the par amount of the security, but to the inflation-adjusted principal. So, if inflation occurs throughout the life of your security, every interest payment will be greater than the previous one. On the other hand, in the rather unusual event of deflation, your interest payments will decrease rather than increase.
