Best Muni Bonds
Muni bonds are primarily described as exempt from federal income tax, which makes them an appealing asset for bond investors. Choosing the right muni bonds involves two key considerations which includes the tax exempt status and the pledge for security repayment.
Tax-exempt Muni Bonds
In most cases, interest accrued on the purchase of muni bonds is exempt from federal and state income taxes in the state where the bonds are issued, however certain bonds may not be tax protected.
Tax exempt status depends largely on the purpose of the bonds. Generally, municipal bonds that serve the public good are exempt from interest income tax, while bonds constructed to fund private projects are, in most cases, subject to federal income tax; muni bonds that fund private party projects are often referred to as private activity bonds. Bond holders of such bonds should be aware that income interest received on these kind of bonds are subject to taxation unless qualified as a financing service that facilitates both the needs of the private activity project and a need by the government to service the public good.
Pledge for Security Repayment, or Risk
Various types of muni bonds are backed by different repayment promises and carry different degrees of risk.
· General obligation bonds promise to re-compensate based on the issuer’s credit rating. These kind of muni bonds generally receive a low interest rate, as the risk is relatively low and the probability of repayment is likely.
· Revenue muni bonds receive a much higher interest rate and carry a higher risk as they promise repayment on projected income upon completion of the project.
· Assessment muni bonds consider repayment based on tax assessments of surrounding properties located within the boundaries of the issuer's location.
To identify the best muni bonds for your portfolio, search for a bond online and consider the information described in the Electronic Municipal Market Access System, or EMMA. In addition to the tax exempt status and security pledged for repayment, investors will find important information about bond pricing, the terms of payment of interest, principle of the muni bonds, and material, financial and operating information. This information is openly available for free to all investors.