Municipal bond interest is also exempt from state taxes if the investor owning the bond lives in the state where the bond was issued. Because of this tax advantage, municipal bonds typically pay a much lower rate of interest than a taxable corporate bond of similar quality. Thus, municipal bonds appeal most to investors in the highest tax brackets, where the tax exemption provides the biggest tax savings. While the market for municipal bonds is huge, it is still mostly a negotiated market. Municipal bonds may be purchased by calling a broker, who will review your investment criteria with you and then show you available bonds fitting your requirements.
Most municipal bonds carry a letter-coded rating to indicate their relative credit quality.
Meaning Aaa AAA Best quality, with the smallest amount of risk. Issuers are extremely stable and dependable. High quality, with a slightly higher degree of long-term risk. A A High to medium quality, with many strong attributes but with some risk exposure to changing economic conditions. Baa BBB Medium quality, currently adequate but with significant risk possible over the long term.