muni bonds how-to

Not all municipal bonds are created equal. "General-obligation" munis are backed by full faith and credit, and taxation powers, of the issuing state or town. "Revenue" bonds are often riskier: They may be financed by the cash flows of a single car park, or golf course, or toll road. On the whole, cities and towns are considered riskier than states. Many muni bonds also carry insurance, though it is of questionable value. But the bottom line is that defaults among municipals of all stripes are rare. Some munis are callable. That means the issuing municipality can pay them off early. And that can make a big difference to the actual interest rate you'll earn. Munis offer lots of theoretical interest rates, but with a callable bond the one to focus on is "the yield to worst." Not all munis are tax-free, either. Some, for technical reasons, are subject to Alternative Minimum Tax. Check the fine print. And if you buy a muni below "par" or face value, some annual gain may be subject to tax as well. On the other hand, munis issued by your state are probably exempt from state as well as federal income tax.