Municipal bonds are among the few tax-advantaged investments available today. They are debt securities issued by state and local governments or one of their components, such as water and sewer systems, local schools or institutions of higher education. Many nonprofit entities like hospitals, museums, and charitable organizations also benefit from municipal bonds.

The interest received from most municipal bonds is exempt from federal income taxes (although it may be taxable if you are subject to the Alternative Minimum Tax) and, in most cases, from state income taxes if an investor purchases bonds issued in his or her state of residence. Tax-free municipal bonds also give you the advantage of fixed income as well as a choice of maturities, and are generally considered to be one of the more conservative investments.

When you purchase a municipal bond, you agree to loan your money for a specified period of time in exchange for a predetermined rate of interest, usually paid twice a year. You receive your principal investment back when the bonds mature. Bond maturity terms can range from three months to 30 years.

Most bonds carry a credit rating based on the risk associated with the issuer and its degree of credit worthiness. Bonds rated between Aaa to Baa by Moody's Investors Service or AAA to BBB by Standard & Poor's are considered investment grade by banks and conservative investors. Non-rated bonds and those rated below investment grade are considered speculative because they have a higher risk of defaulting.

Some bonds, known as insured bonds, carry insurance which guarantees payment of principal and interest when due to the investor if the bond issuer defaults.

Most municipal bonds are secured in one of two ways. General obligation bonds are secured by the full faith and credit of the issuer, usually a state or local government, and its taxing power. Revenue bonds are secured by a pledge of income derived from tolls, mortgages, charges, or rents paid by users of the facility built with the bond proceeds.

Municipal bonds can be used in a variety of structures to enhance your tax situation. Consult your financial advisor to evaluate the appropriate use of municipal bonds in your portfolio.

Scott & Stringfellow is involved in all phases of the bond market, and maintains an active inventory of general obligation and revenue bonds offered throughout our region.

EMMA – Electronic Municipal Market Access

The Electronic Municipal Market Access system, or EMMA, is a comprehensive, centralized online source for free access to municipal disclosures, market transparency data and educational materials about the municipal securities market. EMMA is specifically designed for retail, non-professional investors who may not be experts in financial or investing matters.

Please click on the following link to access the EMMA system:

http://emma.msrb.org/Default.aspx

Any comments regarding tax implications are informational only; Scott & Stringfellow does not provide tax or legal advice. As always, you should consult your tax or legal advisor.