Bewildered by bonds?

—They’re easier than they sound

Page 1 of a 12-page brochure designed to sell municipal bonds. All copy by Alfred Glossbrenner

(215) 736-1213

For many people, municipal bonds still present an air of mystery—an investment field with its own terminology and procedures, something best left to experts and institutions. Yet municipal bonds allow investors to reduce their own personal income tax bite and thus receive more spendable income than is possible with investments whose income is subject to taxation.

   Investing in municipal bonds is really quite simple, once you master a few basic points. This guide from COMARK will help you understand the basics, starting with a definition:

A municipal bond is an IOU issued and backed by a city, town, village, housing authority or other state or local governmental body promising to repay the money it has borrowed on a certain date... and to pay a set amount of interest in the meantime.

   In other words, when you buy a municipal bond, you lend your money to a local governmental body. The terms of the debt, the bond's face value its maturity date, and the amount of interest you will be paid are all printed on the bond itself. As you can see, the term municipal applied to all the bonds in this category, not just those issued by municipalities.

   Port and housing authorities, school boards, hospitals, water and power departments, and many other groups regularly borrow from the public by issuing municipal bonds. In fact, municipal bonds are now offered by over 30,000 governmental groups and other bodies.

    The money you loan them is then used to pay for schools, to improve facilities, build bridges, tunnels, and dams and in general to benefit the community as a whole.

   It was primarily to encourage this kind of investment that Congress passed a law making the interest earned on municipal bonds totally exempt ‑from federal income tax. (You don't even have to report it on your federal tax return.) And for the same reason, most states and localities exempt the interest earned on their own issues from income or personal property tax.