Is there money to be made in munis? This is an investment that is typically attractive to those paying a high rate of US federal taxation. It may now be appealing to the broader public because of the irregularities in the fixed income markets. munis or municipal bonds now offer yields that are higher than corporate bonds without factoring in the tax savings typical of municipal bonds. Interest from munis is free from US federal taxes because of a reciprocal immunity that guards against double taxation at both the state and federal level.

A municipal bond is debt issued by state or local governments for general operations, or agencies that are raising funds for public projects like airports, bridges, and roads. The interest paid by most muni bonds can be tax exempt to the individuals receiving them. It is important to note that are several types of munis with distinctly different features. Many of them are backed by specific revenue flows from a public project or from the general tax collections of municipality. There are some munis that are backed by the full faith and credit of the US government.

The general obligation bonds are reliant on the financial health of the level of the city or state issuing them. They are less secure due to the possibility the issuer will face an inability to pay the interest to the investors if they do not collect sufficient taxes to meet their obligations. This can happen if the tax base declines from lower payroll taxes or lower property taxes. It is possible for munis to default, although the occurrence is less frequent than their corporate counter-parts and the level of recovery is higher.

Revenue bonds are more secure. The interest payments are tied to the money received from specific projects after paying expenses to maintain the facilities. Most people are familiar with toll road or bridges. Those are examples of revenue that can service revenue bonds. A specific type of Muni with the highest level of security is NHA/PHA bond. This stands for New Housing Authority or Public Housing Authority bonds. They are used to fund the development of housing for low income families. If the rental revenue is insufficient to cover the debt, the US government will pay any shortfall.

A relatively recent version of the species is Build America Bonds (BAB). There were created in February 2009 under the American Recovery and Reinvestment Act. The bonds offer special tax credits to investors or federal subsidies to the issuer. The benefit is available only debt issued for capital expenditures created before January 2011. The buyers of BABs include institutions such as insurance companies, commercial banks, and foreign central banks. Mutual funds are the largest buyers.

There are two versions of BABs, know as a Direct Payment BAB or a Tax Credit BAB. The Direct Payment BAB pays a 35 percent federal subsidy to the issuer on the interest they pay-out. This reduces the cost of borrowing for the issuer. The resultant tax savings for the issues flow to the investors in higher yields. These BAB bonds are taxable to investors. The Tax Credit BAB is designed to flow the federal subsidy directly to the investors. Either version provides incentive for US municipalities to issue bonds for building infrastructure.

Overall, there were $2.83 trillion in muni bonds outstanding as of the end of June 2010, according to the Securities and Industry Financial Markets Association. This is on-par with the amount outstanding in money markets inclusive of commerical paper, bankers acceptances, and large time deposits. However, liquidity is a concern in municipal bonds. Some issues are thinly traded and not readily available for purchase or sale.

Currently, there are munis that offer yields in excess of many taxable bonds, which is not typically. For example, a Mmni with around 10 years to maturity currently offers in the range of five percent with coupons payments in excess of six percent, meaning they are trading at a premium. That is competitive to other fixed income products on a stand-alone basis for even non-US tax-payers. For US tax payers, it equates to a 7.7 percent yield. This 'tax equivalent yield' is computed by dividing the yield by the ratio of 100 percent minus the effective tax rate. In this instance it was calculated as five percent/100 percent to 35 percent = 7.7 percent. Longer-term munis tend to be very sensitive to interest rate changes, so they are not offering significantly higher yields in the current environment.

Most munis are quoted on a yield to maturity basis, which is a factor of the coupon to be paid versus the dollar value of the muni, be it trading at a premium or a discount. However, an investor must be informed of the 'yield-to-worst'. That is the lowest yield or rate-of-return that an investor could receive should the bond be called back by the issuer prior to maturity.

Most brokerage house trade munis. However, there would be some houses that specialise in the munis market. Information is available through a variety of sources. The Daily Bond Buyer has data on new issues to be available for sale in the next 30 days. Munifacts is a source of munis trading over the counter or OTC in the secondary markets.

Muni indexes include the REVDEX 25, which a yield based index that focuses on 25 munis with long-term maturies. While the 40-Bond Index is a price-based index comprised of both general obligation and revenue bonds. Those are daily Indexes.