The Pier Shareware 6/The_Pier_Shareware_Number_6_(The_Pier_Exchange)_(1995).iso/017/investba.zip/MUN.TXT

Text File | 1994-10-15 | 6KB | 100 lines

                       The Allure of Municipal Bonds

               Municipal bonds have always been popular with
          investors for one reason -- you earn interest income
          without paying federal income taxes.
               Interest rates on tax-exempt bonds vary depending
          on the maturity date, the issuer, the purpose of the
          issue, and prevailing market conditions.  Over the past
          four years, municipal bond yields have approximated 80
          to 95% of the yields paid on U.S. Treasury securities
          with similar maturities and 75% to 90% of the yields on
          corporate bonds.  Since municipal bond interest isn't
          subject to federal income taxes, that means that for
          someone in the 28% tax bracket, municipal bonds have
          paid a higher after-tax return during the past four
          years.  (Past performance, however, is no guarantee of
          future performance.)  Treasury securities are
          guaranteed as to the timely payment of principal and
          interest.  Corporate and municipal bonds have fixed
          principal value and yield if held to maturity.
               For taxpayers in a 15% tax bracket, municipal
          bonds are probably still not very attractive.  Nor
          should they be used as IRA investments, since that
          income is already tax deferred.  But people in higher
          tax brackets as well as children under 14 whose
          investment income exceeds $1,200 may find municipal
          bond investments attractive.
               To help decide whether you should invest in tax-
          exempt bonds, you need to compare the taxable
          equivalent yield of a tax-exempt bond to the yield of a
          similar taxable investment.
               Municipal bonds have the same risk as other
          bonds -- if interest rates rise, the price of your
          bonds will decline and vice versa.

          Types of bonds

               Municipal bonds are debt issues of cities and
          towns, states and territories counties, local public
          housing authorities, water districts, school districts,
          and similar governmental units.  There are two types of
          municipal bonds:
               * General obligation bonds pledge the faith and
          credit of the government that issues them, meaning that
          the government stands ready to use its taxing authority
          to ensure that the bonds and interest are paid.
               * Revenue bonds are issued to finance a specific
          project, with the revenues from that project being used
          to pay the principal and interest.  They are typically
          used to finance airports, water systems, transit
          systems, and sports stadiums.  It is important to check
          the viability of the project before investing.
               All municipal bonds issued before August 8, 1986
          remain fully tax-exempt, while the tax status of bonds
          issued after that date varies depending on the type of
          bond.  Some municipal bonds are now fully taxable,
          while the income from the others are subject to the
          alternative minimum tax (AMT).  There are three basic
          ways to invest in municipal bonds:
               * Individual bonds can be purchased with a minimum
          face value of $5,000.  You should purchase more than
          one issue in order to provide adequate diversification.
          The after-market for municipal bonds is not as
          extensive as other bond markets, sometimes making it
          difficult to sell before maturity.
               * Unit trusts sell interests in a fixed portfolio
          of municipal bonds, ensuring a constant yield on the
          bonds.  Since unit trusts sell on the open market,
          however, the value of your shares will fluctuate in
          response to changing market conditions.  When the last
          issue matures, the trust ends.
               * Mutual funds also sell interests in a portfolio
          of municipal bonds, but the portfolio changes as the
          fund manager buys and sells bonds to respond to
          changing market conditions.  This means that the yield
          will also fluctuate.
               No matter how you decide to invest, it is
          important to review the investment carefully.  Check
          the credit quality of the bonds, since you will
          probably hold the bonds for ten years or longer.
          Governments can have financial problems just like
          companies, so it is important to invest in high-quality
          issues.
               Review the call provisions of the bond, so that
          you are not surprised by a bond call.  Find out whether
          the bonds carry bond insurance.  The insurance raises
          the credit rating of the bond, but also reduces the
          yield because there is less risk of default.  Insurance
          will not affect market risk.
               Before investing in a unit trust or mutual fund,
          examine all costs.
               Tax reform has left municipal bonds in an elite
          group of investments -- one of the few that exempt
          income from taxes, making them an attractive investment
          for many people.