Municipal Bond Investing

Zero Coupon Bonds

2011-11-26T09:49:00.000-08:00

Bonds that are bought at a deep discount and pay no rate of interest are known as zero coupon bonds. These securities will mature at a larger face value than the price it was bought at.
These investments offer growth within a bond, but they do not offer any current income. These can be found in funds and annuities, since many of those assets are long term.

Taxation

Tax is normally paid each year on the earned interest from zero coupon bonds. This is also known as phantom income, so there is no taxation advantage to them unless they are bought into an IRA or other tax deferred account.

Investment Risks

Fiixed income investments and bonds that do not have a coupons or nominal yields have little or no reinvestment risk. The term reinvestment risk refers to an investor having to deposit or invest their interest payments received from other securities. When interest rates are low, this risk can be amplified. However with 0 coupon bonds - that issue is minimized by the fact that no payments are received until maturity. Since Zeros are usually longer term - this risk is even less realized.

Treasury STRIPS are also Zero coupons. T Strips are Government guaranteed bonds that have no interest paid until the end. Also municipalities and corporations offer them.

Top Stock Trading Course! - free info

Bond Portfolio Management

2011-08-03T15:32:00.000-07:00

Municipal bonds should be a part of most individuals investment portfolio. This is especially true for those in a high tax bracket as Municipal Bonds are tax free at the federal level.

Portfolio Management

Investment Portfolio Management

Most full service brokerage firms offer full or active portfolio management for their investors. The investment management could include, stocks, bonds, funds, insurance, and estate planning.
Having a firm provide investment management for their clients gives the investor a full line of products and allows the person to have their entire portfolio safekept by own firm.

Active

When a broker or advisor is involved in active management, this normally means the investor is frequently investing or changing assets. It also could mean the firm is involved in every financial asset the client has. See also Asset Management

Bonds and Fixed Income Portfolio

Many large investors or institutional clients like Banks and insurance companies have large holdings of bonds and other fixed income product. The active management of these portfolios include seeing the maturities of these investments, and managing interest rate risk.

A good bond money manager will work to ladder out maturities to make sure their is limited interest rate exposure and offering management of the cash flow from these bonds. A fixed income portfolio specialist will also survey the entire market for the best product available through many broker dealers. This is especially important when dealing with municipal bonds - since most of those are held by firms in each state.

New issues of mortgage backed securities and corporate issues should also be part of most large bond product holdings.

Muni Bond Yield

2011-07-24T07:53:00.000-07:00

Learning to calculate a bonds rate of return or yield starts with understanding the different rate indicators involved. Bond yields are based on the coupon rate, the price paid and the maturity length of the investment.
The 3 key interest indicators are: Nominal Yield, Current Yield, and Yield to Maturity.

Nominal

The Nominal rate or coupon rate is the fixed interest rate on the bond. This is the rate that the issuer pays to par value. It is fixed, it never changes and it is only paid to par. Par is the amount of bonds you own. This yield may or may not be your total net rate of return. If the bond was purchased at a premium (above par), then your overall yield to maturity will be lower than your stated coupon rate.

If a bond has a 7% nominal yield or coupon and was purchased at a premium of $103 ($1030), then your YTM will calculate lower because the 7% interest is only paid to the $1000 par. The $30 premium does not earn interest and is not redeemable at par. So, a 7% bond at a premium is not really "yielding" 7% in that example.

A bond purchased at a discount will have the reverse affect on yield. The Yield to maturity would be higher for a discount bond, based on the fact that you are still earning interest on par even if you paid under par. The overall YTM will calculate higher for a bond.

Yield To Maturity

The most important rate of return indicator is a bond's yield to maturity. The YTM factors in everything to give the true overall yield to an investor.

It examines the nominal yield, current yield and years to maturity. The overall rate of return can be effected by the length of time the bond is held. If a 4 point premium was paid on an 8% bond, but the bond has a maturity of 15 years, that yield will be different than if the bond was only good for 2 years.

How to calculate yield to maturity:

This is done by using the key components of a bond: the coupon rate, the price and the years to maturity. A 5% bond priced at $850 and maturing in 15 years would calculate as follows:

Yearly Coupon Interest = $50 (5% paid to $1000)
Total Discount = $150 ($100 par - cost of $850)
Annual Discount = $10 ($150 total discount divided by 15 years)
Average price - $925 (difference between $850 and $1000 par)

Add the $10 annual discount to the coupon payment of $50. This gives you $60, which is divided by $925 and that will give you the yield to maturity of this bond - 6.49%

American Investment Training

Yiled to Maturity

2011-07-17T06:19:00.000-07:00

This is a bond's total rate of return during the full life of the investment. The yield to maturity factors in the nominal rate or coupon, the price paid and the length of the maturity.
The YTM is the most important yield indicator for a bond investment. It factors in the nominal yield, bond price and length of maturity held.

When investors buy bonds, the coupon rate is important, but if the bond price is higher than par - the yield to maturity will be lower. If the bond is bought at a discount, the yield to maturity will be higher.

The nominal yield (coupon) is a fixed rate that is only paid to par value. All bonds redeem at par as well. So, if the investment is purchased below or above par, the yield will be different.

The YTM is actually the current interest rate on a particular bond or similar bonds. If a 7% bond is availale, but interest rates are actually only 5%, the broker or the market will price that bond higher (premium) - to reflect the current interest rate environment. The broker is not going to sell a 7% bond at par when interest rates are 200 basis points lower. A premium will be the market.

If the interest rate climate on these bonds is 5%, the security will be priced for a yield to maturity of around 5%. So, the investor is really getting a 5% overall rate of return on this bond, if held to maturity - even though the nominal yield is 7%. Interest is never paid to a premium or discount. It is only paid to par.

From American Investment Training. More on the link below

Bond Yield

Trading CMO

2011-03-08T05:28:00.000-08:00

Collateralized Mortgage Obligations differ from pass through securities in that they have different types of paying bonds within the CMO. There are many types and tranches to evaluate - each with it's own bond risk.

A CMO has different payment timing risk depending on the type of bond you own. Some offer more protection than others from prepayment or extension risk. These bonds have a more predicatable duration to the bondholder vs. a pass through agency bond. Some CMO's can pay off faster than others.

Learn much more on investing and trading these bonds. Free Info through American Investment Training

CMO INVESTING PAGE

Triple tax free rule - tax exempt state bonds

2009-08-13T09:42:00.001-07:00

Buying municipal bonds within your own home state qualifies for the investment to be triple tax free. That means no federal, state or local taxation. Muni Bonds are normally tax exempt on the interest earned federally - at your ordinary income tax bracket. This rule or allowance is meant to promote investing within your local municipality.

Municipal bonds and notes are issued by state and local governments. These municipalities include:

States
Counties and Cities
Towns and Schools
Municipal Authorities

Interest payments on traditional municipal bonds are exempt from federal tax. They are subject to state and local tax.

Tax Free Yield

When looking to purchase muni bonds, a person should understand how tax exempt yields work. The higher the tax bracket, the higher the yield. If an investor is considering buying a 6% municipal bond at par and they are in the 28% tax bracket, the tax free yield would be higher than 6%. The formula is: Municipal stated rate or coupon divided by 100 minus the tax bracket.

The calculation would break down like this:

6% divided by 72 (100-28), which equals 8.33%. This means that to achieve a better return than this 6% coupon bond, you would need equal to or better than 8.33% in a taxable investment. A lower tax bracket would show a lower tax free yield.

$5100 into $40,000 Trading FOREX HERE

Yield To Call

2009-05-28T16:59:00.000-07:00

Most Municipal Bonds are callable because municipalities normally need to manage their interest rate risk more carefully to handle public Government cash flow and possible short falls.

If a bond is callable, it is very important to be aware of the yield to call. If the investment is called early at a lower price than what you paid, your YTC will be lower. If the call price is higher, then yield is higher.
Usually it is best for call dates to be as far out as possible for an investor. Normally a called bond is an unwanted occurance for an investor. Bonds are usually called when interest rates decline, so an investor will be forced to invest the proceeds elsewhere at lower rates.

Callable bonds are priced to the call date or the maturity date. Bond brokers will price the bond to the call when it's a premium, and price to the yield to maturity when it is a discount bond.

Premium and Discount Bonds

The reason for pricing these bonds differently is twofold. A bond is priced at a premium because the Nominal Yield or coupon rate is higher than current interest rates. Since bonds with higher nominal yields will get called first, it makes sense to price the to the call (ytc). It is also the worse case for the investor. If the bond is called early, the investor will lose the premium faster than if it went to maturity. The yield will be lower if the investment is finished early.

Discount bonds will have a higher yield if they were called early vs. pricing them to maturity. They are not priced to the call normally. Discount debt has a lower nominal yield than the market, so they are less likely to see a call date acted on. Discount bonds are priced to a Yield To Maturity.

Book Recommendation: The Handbook of Fixed Income Securities

Revenue Debt - Types of Revenue Muni Debt

2009-04-05T19:04:00.000-07:00

Types of Revenue Issues

Transportation - These bonds are issued backed by tolls, fees and other transportation collections.

Utility - These revenue bonds are secured by the income of a public utility.

Industrial - These municipal issues are backed by a corporation's payments back to the municipality.

Revenue bonds should be invested based on the geographical area of the investor. Most states offer municipal buyers triple tax free treatment (no state, federal or local tax), if the investment is issued in the home state of the buyer. This will increase the overall tax free yield of the municipal bond investor.

Not every brokerage firm offers revenue bonds. The best selection will normally come from municipal bond brokers that hold inventory for these bonds. These securities are normally traded over the counter OTC between broker to broker. There is usually a mark up for these bonds, not a commission.

Custom Search

Tax Free Investing Ideas - Tax Strategy

2009-01-15T06:15:00.000-08:00

The following is a piece written for investors looking for year end stock and bond investment planning.

Year End Investment Ideas and Tax Strategies

"First thing Monday morning I'm going to march into my boss's office and demand a pay cut so that I'll be in a lower tax bracket next year."
Of course that's ridiculous, but isn't it about the same as the financial community's "Conventional Wisdom" (CW) for year-end tax planning? What about the long-term nature of investing, or the merits of that investment they felt so strongly about in July? What are their motivations, and what discipline thought up these strategies in the first place?

Clearly there are many questions that require answers, but as investors, it should be crystal clear that the object of the investment exercise is to make money... just as much as possible, quickly, legally, and within a low risk environment. The faster it comes in, the more effectively it can be compounded. Otherwise, wouldn't the "CW" be to find as many downers as uppers so that there are no tax consequences? Wouldn't Zero Taxable Gain Investing be the only "smart" investment strategy? A December, 2004 New York Times Money Section article actually suggested that Investment Professionals had an obligation to lose money for clients in order to reduce the tax burden.

Your Financial Professional's perspective may produce smart tax advice but only professional investors (not accountants, attorneys, stockbrokers, financial planners, advisors in general) should be called upon for acceptable investment advice. CPAs may look smarter if you have a lower tax liability, but many of them go too far with a calendar year focus that ignores the realities of an emotional and cyclical investment environment. Take last year's Merck for example. It has nearly doubled in Market Value since you were told to sell it last November... who'da thunk it! Why didn't you buy more (of this and many other high quality losers) instead of selling? Fortunately, not all professionals are into losing money. In fact, in nearly thirty years of dealing with hundreds of Accountants and other advisors, not even a handful have suggested that clients should take losses on fundamentally sound securities, Equity or Fixed Income. Just think if you had taken your dot.com profits in '99, purchased the downtrodden profit making companies of the time, and paid the ugly taxes. The value companies didn't crash. They've rallied for nearly seven years!

The key issue in considering a capital loss is the economic viability of the investment... not your tax situation! A key element of The Working Capital Model (for investment portfolio management) is to eliminate the weakest security in a portfolio every time the Market Value of the portfolio establishes a significantly new "All Time High" profit level (an ATH). My definitions may be different than those you are used to: (1) Profit = Total Market Value - Net Portfolio Investment, (2) A "weak" security is a stock that is no longer rated Investment Grade by S & P, or no longer traded on the NYSE, or no longer dividend paying, or no longer profitable. Income securities whose payout has fallen to way below average (or risen to an unsustainable level) could also be culled at an ATH. Securities that have fallen considerably in Market Value for no apparent reason (other than recent news or changing interest rate expectations) are referred to lovingly as "Investment Opportunities". This is what you look for while trying to reinvest your profits... like last year's MRK. By the way, switching from the strong asset class to the weaker one as a "hedging strategy" or vice versa (as a greed motivated speculation) is simply an attempt at "market timing", not a "sophisticated" or "savvy" adjustment to your asset allocation. Asset Allocation is always a function of personal factors and never a function of asset class (Equities and Income Generators) directional speculation.

So what happens if a new portfolio ATH is achieved in February or August instead of in November or December? (Note that the financial community only preaches tax loss strategies during the last calendar quarter.) Should you unload all the weak issues at the same time, even those purchased just a few months ago? Management of your portfolio requires the disciplined application of consistent rules and guidelines, and every manager will develop his or her own style. But in a high quality, properly diversified, income generating portfolio, (1) the number of weak issues will generally be small and (2) the probability of escaping with only a minimal loss very real. Keep in mind two basic investment axioms: There is no such thing as a bad profit, regardless of the tax implications; and no matter how you may rationalize, there's no such thing as a good loss. So, sure, if a loss should be taken due to an ATH in February, bite the bullet on the one security (only one) with the declining fundamentals (A Merrill Lynch/CNN/CFP opinion is not a fundamental.) If there are none, good job!

Profits are the holy grail of investing. Few people will admit just how infrequently they have experienced them or, conversely, just how frequently they have watched them disappear beneath the waves of a correction. (Like gamblers retuning from Vegas... no one ever seems to lose!) Similarly, most financial professionals will counsel their charges to let their profits run, particularly around year-end. Surely, speaketh the CW prophets, these profits will hang around until next year, thus deferring those terrible taxes! (Worked real well at year-end '99, you'll recall.) Don't think for a moment that anyone knows what will happen this time around the rally pole, particularly in those ridiculously priced ETFs, which are put together with the same kind of spit and duct tape used for the dot.coms. Always take your profits too soon, because you can't get poor that way!

First thing Monday morning I'm going to: (1) Call my accountant to tell him that I'm going to help him reduce his tax burden by not paying him, (2) continue to view the Investment process in cyclical rather than calendar terms, (3) limit my tax liability by how I invest, not by taking unnecessary losses, (4) continue to make as much money as possible, as quickly and safely as possible, and (5) contact the media, my political representatives, and anyone else I can think of that will help in the fight to abolish the taxation of all investment and retirement income.

Steve Selengut www.valuestockbuylistprogram.com Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

The Handbook of Fixed Income Securities

More On Tax Free Municipal Bonds

Tax Free Municipal Bonds -- Are They Right for You?

2008-09-30T12:03:00.000-07:00

Tax free municipal bonds are an alternative investment for those looking to diversify their investment holdings in a tax-free manner, but they may not be right for everyone. There are several things to consider when making the decision on whether or not to invest in these. Let's take a look at some of those considerations.

First, let's take a look at just what a tax-free municipal bond, or MUNI for short, is. A MUNI is a bond issued by a city, state, or county government to finance some new taxpayer-financed project. These projects could include things like highway improvements, new schools, and new libraries. The income received from these bonds are always free from Federal income tax, and may be free from state income tax as well, provided the investor resides in the same state as the source of the bonds.

How do you know if MUNI's are right for you? The short answer is, the higher your income tax bracket, the more benefit you will receive from a tax-free bond. If you were to compare a taxable bond with a tax-free MUNI, then you would divide the tax free yield of the bond by 1 - your income tax bracket. For instance, if your MUNI is a 5% yield bond and your income tax bracket were 15%, then you would divide 5 by .85 to get an equivalent yield of 5.88%. So, an equivalent taxable bond would need to yield 5.88% to enjoy the same income benefit as the tax-free bond.

Another motivation for investing in tax free municipal bonds lies completely outside of the financial arena, and that is the desire to help support local projects. By investing in your city's projects, you can support your local economy and overall community. The income derived from the bonds can be the icing on the cake in this particular instance!

A final thing to consider when deciding on whether or not to invest in any particular tax-free MUNI is the financial solvency of the issuing entity. In general terms, financial analysts recommend that the issuing party should have the following minimum characteristics:

1. The population of the entity should be at least 10,000
2. The entity should have a diverse economy with many sources of income - No one company towns here.
3. The entity should have a long history of prompt interest payments on it's bonds.

Any bonds that fall short of these minimum criteria should, for the most part, be considered far too risky for the average investor's portfolio.

As with any investment, careful consideration and research should be done before making the final decision to invest. Tax-free municipal bonds can be a great way to earn some non-taxable income, provided you do your homework. So, are tax-free MUNI's right for you?

For lots of other investment and personal finance information, be sure to visit Personal Finances Blog today. There you will find information on everything from money merge accounts to Money Market Savings Accounts.

Finance and Investment Books

Callable Bond - Muni Bond Call Features

2008-07-17T17:35:00.001-07:00

Most municipal bonds are callable because municipalities need to protect their interest rate risk and fiscal spending more than private corporataions. Corporate bonds can be callable, but more munis - per bond have this feature.

A bond being called means the issuer has redeemed the security early because they wish to refinance the notes or bonds at a lower rate or is looking to retire the debt completely. This can only be done based on an upfront disclosure of the call dates, prices and options on when these can be redeemed and even the circumstances in many cases.

Each municipality is different and each bond offering has it's own features but most issues will have multiple or continuing call dates throughout the life of the muni issue. This allows the city, state or other municipality have greater flexibility on when the bond can be called. Interest rate environments change and should rates decline sharply but passed a one time call date, it could damage the issuer. This is why many muni issues have multiple callable dates.

The most common reason why any bond is called is that interest rates have declined enough where the paying interest rate to bondholders is too expensive or well above market. Calling back early allows the municipality to come out with cheaper bonds (interest cost to them) at a lower rate.

Changing maturity schedules could be another reason redeem muni issues early.

Recommended Muni Bond Reading

The Handbook of Municipal Bonds (Frank J. Fabozzi Series)

Triple Tax Free Muni - Federal, State, Local Tax Exempt

2008-04-15T08:33:00.000-07:00

Traditional tax free municipal securities are normally tax free at the federal level but subject to state and local taxation.

Some investors can receive interest on Municipal bonds exempt (tax free) from federal, state and local tax. In most states, if you buy a muni bond issued in your home state, that investor can avoid paying the 3 levels of taxation.

This is why most investors buy muni investments issues in their home state. Familiarity and the tax free benefits make that a wise tax based choice.

Another situation that allows for triple tax free status is when a bond is bought that is issued by a U.S. Territory. Examples include Puerto Rico, US Virgin Islands and Guam.

Creating a portfolio of municipal bonds makes sense, because of the exempt status at the federal level, the tax free yield, the credit quality and the possible opportunity to buy muni bonds that can take advantage of the triple taxation exemption.

401k Retirement Accounts

Bond Yields

New Issue Municipal Bond Underwriting

2007-11-15T13:52:00.000-08:00

Municipal securities can come through the market as a new issue on a competitive or negotiated basis. A competitive underwriting is when broker dealer compete to get bids on a new issue of bonds. The municipal issuer will choose the lowest net total cost to them.

General Obligation bonds are only done on a competitive basis. This is because a G O Bond is backed by tax dollars so the underwriting must be done competitively. Revenue municipal issues can be done negotiated or competitive since their bonds are backed by user revenue and not tax dollars.

Other items involved in an underwriting include:

Notice Of Sale - this is when the municipal issues posts an offering announcement of a bond that is coming out in the future. Broker Dealers will bid on the bonds using this form.

Official statement - This is the prospectus of a municipal issue during the underwriting period. It is the most detailed document regarding the issue. All important information related to the issue will be shown in the official statement.

Muni Bond Investing

Municipal Securities

Construction Loan Notes

2007-09-29T06:36:00.000-07:00

Construction Loan Notes (CLN) are used by municipal issuers to build housing projects. The notes are issued with 2-3 year maturities or up to 5 years.

Interest on Municipal construction notes is paid every 6 months, with the interest being exempt from federal tax, subject to state and local tax. When the project is finished - a long term bond issue is floated and the proceeds are used to pay off the construction loan note.

CLN's raise their money differently than tax anticipation notes or revenue notes.

Revenue Municipal Bonds

Revenue Bond Investment

2007-09-16T17:25:00.000-07:00

Investing in Muni bonds can include Revenue or G O (General Obligation) bonds. Revenue bond investments are backed by a municipality (Town, City, State etc.) using a revenue source (not taxes).

A debt security backed a by a bridge toll or other revenue source that is used to back the investment, which includes principle and interest to the bondholder. These would be considered revenue bond sources.

Types could include Transporation (tolls, airports, bridge), but there are also revenue investment types such as healthcare and utility municipal securities. Utilities would issue bonds backed by an increase in usage fees to back the investment and the bondholder.

Hospital issues would be revenue bonds backed by user and stay fees.

Revenue issues are rated based in part by the issuers ability to raise the needed money for the bond holders. A feasibility study is nomally done to show the muni issuer does have it's plan endorsed. This study is normally done by an outside consulting company that specializes in municipal bond investments and new issues.

http://www.brokerjobs.com/munibonds.htm

Municipal Notes

2007-09-01T14:05:00.000-07:00

Muni notes are short term municipal securities that are normally used for temporary financing for a state, city or local authority. Their maturities are one year or less.

They are issued based on the anticipated income source that is due the municipality. Many are called Anticipation Notes, because of the anticipation of revenue. Examples include:

TAN - Tax Anticipation Note

These are backed by tax revenue that is expecting to come in.

RAN - Revenue Anticipation Notes

For revenue that has yet to be cleared from another project or other reason.

BAN - Bond Anticipation Note

For proceeds of a bond issue.

There are also CLN's - Construction Loan Notes

These debt securities are considered money market investments. They are safe and short term without wide price movements or interest rate sensitivity.

Muni short term securities give flexibility to a municipal issuer.

http://www.aitraining.com/municipalbond.htm - More on all Muni Securities and Bonds

How To Buy

2007-08-01T15:29:00.000-07:00

Buying Municipal Bonds is done mainly through regional broker dealers that maintain an inventory of state issued bonds. Most of the larger Muni Bond dealers have inventory that may be posted online.

They are bought in amounts of $1000 minimum. The tax free status makes them most attractive to investors in higher tax brackets.

If the municipal security is bought in the secondary market, the bond will settle in 3 business days. Interest will accrue from the settlement date from when the investor buys and pay every 6 months.

Knowing how to buy muni bonds is the same as most other bonds that trade in the secondary market.

Yield

2007-08-01T15:25:00.000-07:00

Municipal bonds and notes are sold to a stated yield. This can be priced to the call date or the maturity date.

Once the yield is known, you can figure out the tax free return based on your tax brackets and the stated yield. You take the YTM and divide it by 100 minus the tax bracket. The higher the bracket - the higher the rate of return.

Muni bonds can be quoted based on the price or yield. Term bonds, which have one maturity will be quoted in price. Serial bonds - which are several maturities of an issuer does not quote on price.

The yield to call may be greater, equal or less than the basis or YTM.

http://www.aitraining.com/bondyield.htm

Closed End Municipal Bond Funds

2007-08-01T06:08:00.000-07:00

A closed end fund is management investment company that is traded in the secondary market. The fund trades OTC or on exchange and charges a commission, just like shares of individual stocks. A closed end muni bond fund operates the same way.

The fund company will pay out dividends to shareholders based on the net income of the fund. Since municipal securities are fixed income investments that pay interest, this type of fund will pay regular dividends and is considered a type of index fund.

The company is actively managed and the investors have the right to vote. The shares can split as well. A net asset value is calculated each day, but the shares trade in the open market and the price is based on supply and demand - as well as market directions.

Since funds can pool money and invest in thousands of municipal bonds, an investor can be partially invested in all of these bonds for much less money than they would need to buy even 1/10 of these bonds on an individual basis. A fund manager will manage cash, maturities and interest rate changes.

http://www.aitraining.com/closedend.htm

Zero Coupon Municipal Bonds

2007-07-31T18:44:00.000-07:00

Some issuers will come out with bonds that do not pay interest. These are zero coupon muni bonds. They are issued at a deep discount and pay par at maturity. Basically, you are earning the discount difference and that is calculated to a yield to maturity.

Since no interest is paid, there is not reinvestment risk - but there si also no current income.

Zero coupon municipal securities are most attractive when interest rates are low, since coupon rates on existing bonds will be lower anyway and professional investors do not have to reinvest the proceeds into something lower.

http://www.aitraining.com/zerocoupon.htm - Learn more or post questions and comments here.

Tax Free Yield

2007-07-31T18:19:00.000-07:00

The main benefit in investing in municipal bonds is gaining the tax free yield. The attractiveness of this rate of return will depend on the nominal yield and the tax bracket of the investor.

The higher the bracket - the higher the tax free or equivalent yield. You calculate the after tax return by taking the stated rate, coupon rate or given yield if issued at par and divide that by 100 - the bracket of the investor.

Example

A 6% muni bond at par with an investor in the 28% tax bracket would calculate as follows: 6 divided by 72 (100-28) = 8.33%.

If an investor was looking to compare this investment against a taxable bond like a corporate bond - the taxable bond would have to yield over 8.33% for this investor to be interested in it.

The tax free yield formula is the same if it was a G.O. Bond or a revenue bond. It is based on the federal ordinary income bracket and the stated yield.

http://www.aitraining.com/municipalbond.htm

Municipal Bond Basics

2007-07-31T10:46:00.000-07:00

A muni bond is a public debt issue by a state, city, local or other municipality that has issued a bond for the purpose of rasing money.

Investors gain a valuable benefit as the interest earned on municipal securities is federally tax free. They are subject to state and local tax. Many investors can avoid all interest taxation if they purchase a bond issued in their primary home state.

There are 2 primary types: Revenue and General Obligation Bonds (GO). A revenue issue is backed by the municipalities collections - such as fees and tolls to support the issue and pay back the bondholders. Bridges and other transportation issues tend to be at least partly revenue backed.

General Obligation Bonds are backed by the taxing power of the municipal authority.

There are tens of thousands of issues currently in the market for investors to buy. Many of the bonds are callable - which means the issuer can redeem the investment early based on a pre-set date and price. Each Muni is rated based on it's credit quality. AAA is the highest rating for a municipal issue - as it is for all other debt securities.

http://www.aitraining.com/municipalbond.htm