Types of Bonds
Municipal Bonds: The Basics
Municipal securities are the debt obligations of states, their political subdivisions (such as counties and cities) and certain agencies and authorities. More than 50,000 state and local government units issue securities to raise money for public purposes such as water and sewer systems, schools, highways, housing, hospitals and other public facilities.
Individual ownership of municipal bonds, purchased directly or through mutual funds and unit investment trusts, has grown from $137 billion in 1980 to $1.4 trillion at the end of the third quarter of 2003, according to the Federal Reserve.
Under present federal income tax law, the interest income from tax-exempt municipal bonds is exempt from federal income taxes.*
In most states, interest income received from securities issued by governmental units within the state is also exempt from state and local income taxes. Moreover, interest income from securities issued by U.S. territories and possessions—Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa and the Northern Mariana Islands—is exempt from federal, state and local income taxes in all 50 states.
* If you are subject to the alternative minimum tax (AMT), you must include interest income from certain municipal securities in calculating the tax.
All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.