Types Of Municipal Bonds  

      Municipal bonds are issued by state and local governments. The municipalities allowed to issue municipal bonds are states, counties, cities, towns, schools, and other municipality authorities. Usually interest payments on municipal bonds are exempt from federal taxes but they may be subject to state and local taxes.

      If you are looking to invest in municipal bonds, you should first understand how tax exempt yield works. The higher the tax bracket of the investor, higher is the yield. For example, an investor is thinking of buying a 6 percent municipal bond at par and he is in the 28 percent tax bracket, the tax-free yield will be higher for him than 6 percent.

To calculate tax free yield, you can use the following formula:

Tax free yield = Municipal state rate divided by 100 minus tax bracket

Types of Municipal Bonds:
There are primarily two types of municipal bond and they are as follows:

  • General Obligation Bonds

These are the most common municipal bonds and are also the better rated ones. A state that raising money and backing a bond issue with higher income or sales tax is considered to be general obligation bond.

A school district raising money through a dealer using school or property revenue tax to secure the bond is also considered to be a general obligation bond.

  • Revenue Bonds

Issues that are dependent on revenue producing ability of a facility are known as revenue bonds. There are many types of issuers that would fall under this category, namely transportation, health care, utility companies, and industrial units.

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Types Of Municipal Bonds





How Are Municipal Bonds Taxed ?

How Are Municipal Bonds Taxed     Interest on municipal bonds is paid by local and state agencies who issue the bond. The best part is that most municipal bonds do not fall under the purview of IRS so you might never have to pay taxes on the interest. This is the reason why these bonds are offered at lower interest rates. More...




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