Zero-Coupon Municipal Bonds

UNDERSTANDING THE MUNICIPAL MARKET

Municipal securities are the debt obligations of states, their political subdivisions and certain agencies and authorities. The municipal securities market is one of our nation’s most remarkable institutions, providing a mechanism whereby more than 50,000 state and local government units can issue securities to raise money for public purposes such as water and sewer systems, schools, highways and public buildings.

Under present federal income tax law, the interest income from municipal securities is exempt from federal income taxes. In most states, interest income received from securities issued by governmental units within the investor’s own state is also exempt from state and local income taxes (see table on Topic 10). Interest income from securities issued by U.S. territories and possessions is exempt from federal, state and local income taxes in all 50 states as well.

In addition to offering tax advantages, municipal securities have had an extraordinarily good record of paying interest and principal on time. In the past 50 years, fewer than one percent of the hundreds of thousands of municipal bonds issued have gone into default.

Individual ownership of municipal bonds, purchased directly or through mutual funds, has grown from approximately $130 billion in 1980 to $1,852 billion at the end of 2007.

For more detailed information on municipal securities, you may want to ask your account representative for a copy of An Investor’s Guide to Municipal Bonds, available from the Securities Industry and Financial Markets Association.