Municipal Bonds

WHAT ARE MUNICIPAL BONDS?
Municipal bonds are securities issued by state and local governments, their agencies and authorities, frequently to finance public improvement projects. Interest from municipal bonds usually incurs no federal taxes, and often, no state or local taxes.

WHEN SHOULD YOU CONSIDER MUNICIPAL BONDS?
If you are looking for a conservative investment to balance the risk in your portfolio, consider municipal bonds.

WHAT ARE THE BENEFITS OF MUNICIPAL BONDS?

Obtain tax-exempt income
The distinctive feature of tax-exempt municipal bonds is that the interest is exempt from federal income taxes.¹ And the interest is also often exempt from state and local income taxes. These tax-exempt earnings can be especially attractive to investors in higher tax brackets — particularly residents of a high-tax state who buy municipal bonds that are tax-exempt in that state.

Benefit from a low minimum investment

• Bonds are issued at a face value of $1,000 and trade in multiples of $5,000.
  
  
• Coupon interest is paid, in most cases, semiannually.

Participate in the primary or secondary market

• The primary market is for new bonds sold by the issuer to the public by a single municipal securities dealer or a syndicate of dealers.
  
  
• The secondary market is the trading market in which bonds are bought and sold through various municipal securities dealers.

Choose from a variety of securities

• There are different kinds of municipal bonds for different kinds of investors. Some types include:
  
  
  • General obligation bonds, which are backed by the full faith and credit, as well as the taxing power, of the issuing municipality.
    
    
  • Revenue bonds, which are backed by the proceeds of a specific project, such as a toll road or bridge.
    
    
  • Insured bonds, which provide additional security. If an issuer defaults on interest and principal payments, an insurance company agrees to make these payments.
    
    
  • Refunded bonds, which will be redeemed prior to their stated maturity dates. They are often secured by U.S. government securities.
    
    
  • Zero-coupon bonds, which are bought at a discount price and usually appreciate tax-free to their full face value in lieu of periodic interest payments.
    
    
  • AMT bonds, which pay a higher yield to investors not subject to the alternative minimum tax (AMT). Note: If you are subject to the AMT, the interest income will be taxed at the AMT rate.
    
    
  • Taxable municipal bonds, which earn interest subject to federal income tax. (Bonds from in-state issuers are exempt from state and local taxes in most cases.)
    
    
• Although not applicable to all bonds, some municipal bonds have call features. Callable bonds give the issuer the option to redeem the bonds prior to maturity. In a falling interest-rate environment, there's a greater likelihood an issuer will redeem the bonds early.

Gain liquidity

• Many municipal bonds are actively traded nationwide, so you may be able to sell your holdings, if you wish, before the maturity date. The price you receive in the secondary market will be subject to current market conditions; therefore, it may be higher or lower than the price you originally paid for the security.
  
  
• Merrill Lynch has one of the largest inventories of investment-grade municipal bonds, including a broad selection of issuers and most market sectors. These numerous choices are a combination of primary and secondary offerings.

Reduce your taxes while increasing your rate of return

• The interest from municipal bonds is exempt from federal tax. Consequently, tax-free bonds usually pay a lower interest rate than a taxable investment with a comparable credit rating and maturity.
  
  
• When you are deciding whether to invest in tax-exempt municipal bonds or taxable bonds, consider their respective yields. Assuming your investment account is taxable and not tax-deferred, the tax-free yield should be compared with the after-tax return on a taxable bond.
  
  
• Municipal bonds' tax-free advantages are especially valuable for investors with high tax liabilities — even more so for a resident of a high-tax state who buys municipal bonds that are tax-exempt in that state.

Increase your flexibility
Municipal bonds have maturity dates that range from several months to 30 years or more. Investors can decide when their capital is needed and choose a bond's maturity accordingly. A municipal bond investment can, therefore, be as flexible as any other part of your portfolio while offering less risk and volatility.

WHAT ARE THE RISKS OF MUNICIPAL BOND INVESTING?
Municipal bonds historically have been high-quality investments relative to other fixed-income securities. However, when deciding whether to invest in municipal bonds, you should also consider the risks. Generally, the risks relate to default risk — the issuer's ability to pay interest and principal on a timely basis, and market risk — market price fluctuation (if you sell prior to maturity). With respect to default risk, you should review the credit rating of the particular municipal bond. You should also review the financial condition of the issuer through available documents prepared by the issuer. With respect to market risk, generally the market price of a municipal bond will fluctuate relative to changes in interest rates.

MERRILL LYNCH CONTINUES TO BE A LEADER IN THE MUNICIPAL BOND MARKETS

In underwriting: Merrill Lynch has the ability to commit its own capital so investors can have a wide range of bond issues from which to choose.

In bond trading: We can provide superior trade execution and service support on a broad selection of offerings to meet your investment needs.

In municipal research: We can offer insights on current market opportunities and educational reports on topics relevant to your individual situation.

Not only can we provide access to a broad array of municipal bond offerings, we can help you select the securities appropriate for you and employ innovative strategies to help you meet your financial goals.

HOW CAN YOU GET STARTED?
Ask a Merrill Lynch financial advisor how municipal bonds can help you achieve the life you want. A financial advisor can look at your finances in total and work with you to develop customized strategies that fit your goals, risk tolerance, investing style and time horizon.

1. If you are subject to the alternative minimum tax (AMT), interest income from certain municipal securities is included in calculating the tax. You may want to consult your tax advisor concerning an investment in municipal bonds.