MUNICIPAL BONDS

Municipal bonds are issued by cities, counties, states, and school districts. The bonds are used to fund projects such as highways, new schools, etc. "General obligation bonds" are unsecured municipal bonds that with maturities of at least 10 years and are paid off with funds from taxes or other fees.

The interest on municipal bonds are usually exempt from federal taxes, state and local taxes. However, capital gains that occur when the bond is sold or at the time of maturity (if the bond was bought at a discount) are taxable.

Municipal bonds are considered safer than corporate bonds because a local government is less likely to go bankrupt than a corporation, but there are no guarantees. Also, the bonds are not FDIC insured.

Updated by ADAMS KESSLER 10/9/2008