Municipal bonds are debt obligations of states, local municipalities and other public authorities. The interest paid on municipal bonds is not subject to federal income taxes.

When analyzing the possibility of investing in municipal bonds, an investor should consider the following in developing a strategy:

1. Review the slope of the municipal yield curve; it may be feasible to purchase long-term maturities of rates that are substantially higher.
2. Do not "reach" for securities providing yields well in excess of those generally available in a particular market sector. There are usually negative reasons for such high yields. If security is important, avoid such situations.
3. Research the security provisions being pledged to determine the impact current economic trends could have upon the issue’s ability to honor those provisions.
4. Consider call provisions in purchasing municipal securities; try to lock in today’s high coupons by choosing bonds with the maximum call protection.
5. Make purchases in amounts of $25,000 face value or more, if possible. This enhances the ability to sell securities efficiently in the secondary market prior to bond maturity.
6. Do not confine municipal purchases to only one issuer. If possible, diversify geographically and across market sectors (i.e., general obligations, public power, housing bonds, and industrial development) to protect the portfolio against adverse market conditions. Bond funds provide this mix for investors with smaller amounts to invest.
7. Consider your total tax picture, including local income and personal property taxes. Be aware of the capital appreciation tax impact upon securities purchased at a discount. While the yield on a discount bond may be comparable to that of a bond with a current market coupon, the return after capital appreciation tax could be less.
8. Obtain as much information as possible on the credit worthiness of the issuer. Study the prospectus if available. Disclosure of facts made in such documents is relevant to the investment security and level of risk involved and should have a bearing upon your investment decision. Determine if tax preference is applicable.
9. Request the rating levels assigned by Moody’s and Standard & Poor’s to the issue you are purchasing. Such ratings are intended to serve as a guide to the relative safety of the issuer and have a major influence upon the market values.
10. Review your portfolio regularly to determine whether your financial objectives are being met. Volatile markets necessitate constant review and, from time to time, adjustments to your portfolio.