thus, have highly rated bond issues, many muni bonds carry insurance to protect the investors from the default risk. Any insurance carried on the bonds strengthens their credit rating, usually up to the highest level.
REVENUE BONDS. The principal and interest on revenue bonds is paid from the income received from specific projects or entities. Examples of revenue bonds are water, sewer, gas, and electrical facil- ities; bridges, turnpikes, tunnels and highways; and hospitals and power plants.
SPECIAL TAX BONDS. These bonds are usually backed and payable through a single tax, or series of special taxes. They may also be payable through another specific income source.
Municipal bonds can be prerefunded, and are also subject to high credit ratings. Prerefunding a bond issue means that the issuing municipality has purchased U.S. government securities that have the same maturity term as the municipal bond. These securities are then held in a special account, where they are the collateral for the muni bond, therefore reducing the risk of default.
Similar to corporate bonds, muni bonds also have an interest rate risk and call provisions. However, you must determine whether the tax-free interest outweighs the possibilities of having your bond redeemed prior to maturity or having the interest rate increase. Usu- ally, though, investors in higher tax brackets enjoy having some municipal bonds in their portfolios to help increase their overall, after-tax return on their investments.
U.S. Government Obligations There are a number of different kinds of marketable U.S. government securities, including Treasury bills, notes, and bonds.
TREASURY BILLS. Treasury bills are sold at a discount (less than the face value) and mature at face value. They mature at different periods, usually 13, 26, and 52 weeks. Bills are considered highly liquid, secure, short-term investments.
TREASURY NOTES. Treasury notes have maturities ranging from 1 year to 10 years. They are sold at or near their face value and pay their interest on a semiannual basis.