THE STEADY STAPLES OF A WELL-BALANCED PORTFOLIO
income tax they pay isn’t deductible or mostly deductible, their com- bined effective income tax rate is 39.4 percent. Then the after-tax yield on the bank CD would be 4.97 percent. It’s important to remember that this analysis doesn’t apply to U.S. Treasury securities or other direct government obligations because they are already exempt from state and local income taxes.
(1 – .394) 8.2% = 4.97% Amounts are hypothetical.
There are many kinds of municipal bonds, in terms of how the bonds are backed financially. They include general-obligation bonds, special tax bonds, revenue bonds, insured municipal bonds and more.
GENERAL-OBLIGATION BONDS. Municipal bonds are usually not secured by physical property; instead, they are debts payable from the state or local governments’ general tax revenues. G-O bonds are normally considered to be high-quality and highly secure invest- ments, in line with the creditworthiness of the issuer.
HOUSING AUTHORITY BONDS. Housing authority bonds are issued to pay for low-rent housing projects and are backed by the promise of unconditional, annual contributions by the Housing Assistance Administration, a government agency. These bonds are considered among the highest in quality.
INDUSTRIAL DEVELOPMENT BONDS. These bonds are issued either by a municipality or a municipal authority to finance and promote areas like industrial parks. They are backed by the lease payments made by the industrial companies that use or fill the facilities that are paid for by the bond issue.
Municipal bonds are also rated, just like corporate bonds are. The quality ratings for munis are second only to U.S. government and government agency securities. Moody’s and Standard & Poor’s, again, are the companies that rate these bonds.
INSURED MUNICIPAL BONDS. Although state and local municipali- ties who issue bonds are generally thought to have good credit, and