General Obligation Bonds:
General obligation (GO) bonds are backed by the issuer's pledge of its full faith, credit and taxing power for the payment of the bond. GOs are generally viewed as the most secure type of municipal security and typically finance public projects such as schools, parks, libraries, roads and city halls.

Revenue Bonds:
Revenue bonds are payable from revenue derived from tolls, charges, fees or rents paid by those who use the facilities constructed with the proceeds of the bonds. For example, a water revenue bond would typically be payable from water charges and other revenues of the water system.

Variable Rate Demand Bonds:
Commonly called "floaters," variable rate demand bonds are long-term municipal bonds that act like short-term notes because they reflect short-term interest rates and offer short-term liquidity. They are typically secured by an irrevocable letter of credit from a domestic or foreign bank or a bond insurer with a liquidity facility from a domestic or foreign bank.

Housing Revenue Bonds:
Housing bonds are payable from mortgage loan payments and may be additionally secured by various types of insurance and/or state, federal or local support programs.

Special Tax Bonds:
Special tax bonds are payable only from the proceeds of a special tax, such as highway bonds payable solely from a gasoline tax.

Lease Revenue Bonds:
Similar to COPs, lease revenue bonds are also secured and payable from lease rental payments made by a municipal entity. Examples: parking lots, office buildings.

Certificates of Participation:
Certificates of participation, or "COPs" as they are commonly known, are typically secured and payable from lease rental payments made by a municipality for use of projects being financed with the COPs. Examples: computer equipment, fire engines, police cars.

The advantage of investing in tax-exempt municipal bonds is best described by comparing what a taxable investment would have to yield after taxes in order to match the tax-free returns offered by municipal bonds on a taxable equivalent basis.

Low Credit Risk:
High-quality municipals are considered a conservative investment because their interest and principal payments are considered quite secure. Even though the issuer promises to pay the full amount of the bond when it matures or comes due, there may be interim fluctuations in the bond's market price before it reaches maturity. Municipal bonds offer a degree of safety that is comparable to U.S. government obligations

Flexibility:
Maturity dates on municipal securities can range from several months to 40 years or more. Investors can decide when they want their principal returned allowing them to tailor their investment horizon.

Diversity:
The municipal market is one of the most diverse of all the fixed-income markets in terms of numbers and types of bonds. There are general obligation bonds secured by the full faith and credit of a state or local government, as well as revenue bonds backed by revenues from a particular project, such as a toll road or bridge. There are also special kinds of municipals issued to meet particular investor needs. These include alternative minimum tax (AMT) municipals, often offering higher tax-free yields for investors who are not subject to the AMT, refunded municipals and insured municipals for safety conscious investors and zero-coupon municipals, offering investors an assured way to increase a sum of money provided the bonds are held to maturity.

With the wide variety of issuers and types of bonds available today, it is easy to diversify your investments. Your tax advisor or a qualified broker can help you determine the most effective way to structure your portfolio -- and balance risk and reward.

Marketability:
Municipal Bonds are actively traded nationwide through a network of broker-dealers and dealer-banks, providing a fairly liquid market. If you sell bonds prior to maturity, you will receive the current market price, which may be higher or lower than the original price.

Credit Risk:
Credit risk is the risk that an issuer will be unable to make scheduled interest and principal payments. Rating agencies review the issuer's ability to make interest and principal payments and assign a rating as to the issuer's credit worthiness. The higher the rating, the less risky the security, and conversely, the lower the rating, the more speculative the security. Bond rating agencies continuously review the credit worthiness of each issuer and the assigned ratings can change. A change in rating may affect the price of the security.

Market Risk:

Market risk is the risk that you might have to sell your security at a loss prior to maturity. As interest rates rise, the price of your bond may decrease, meaning you would suffer a loss if you sold the bond prior to maturity. Conversely, when interest rates fall, the price of your bond may increase, and you might receive a profit if you sold. If an investor holds a bond until its maturity market risk is not a factor.

Call Risk:

Many U.S. agency, municipal and corporate bond issues have provisions which allow the issuer to call, or redeem, all or a portion of their outstanding bonds prior to maturity. This call feature, known as an optional call, may be at a premium or at par and may occur even prior to the stated redemption dates. When interest rates fall, an issuer may opt to call bonds and refinance the project at the prevailing lower interest rates. Depending on the price you paid for your bonds, this could affect your yield. In addition to optional call features, some issues such as municipal housing bonds have special redemption calls. Should the issuer have excess funds due to prepayments or unexpected proceeds, these funds must be used to redeem outstanding bonds. These types of calls can occur at any time, are par calls and may affect the yield you receive.

Duration Risk:
Duration is a calculation which takes into account the maturity date, coupon rate, and yield on a bond. The duration figure will give you a close approximation of how much a bond's price will change for each percentage change in interest rates. Generally speaking, the longer the term to maturity the greater the potential the price will fluctuate in response to interest rate movements. The fixed coupon rate of a bond also affects how much the price of a bond will fluctuate. The lower the coupon rate, the more volatile the price of the bond will likely be.

New York State Comptroller
Office of Unclaimed Funds
110 State Street
Albany, New York 12236-0001
(800) 221-9311

The three major rating agencies that evaluate municipal credit are Moody's Investors Service, Standard & Poor's Corporation (S&P), and Fitch Investors Service. They research the issuer's ability to repay debt and then assign a rating symbol which ranks the quality of the bonds. The chart below describes the rating symbols used for bonds and notes.

Bonds

Bond ratings listed above the line are considered "investment grade."
Those below are considered speculative or "below investment grade."

Notes

Safety:
Timely payment of principal and interest on insured bonds is unconditionally guaranteed by the bond insurer. The major bond insurers are all rated in the top rating category -- AAA -- by Moody's Investors Service and/or Standard & Poor's Corp and Fitch Investor Service. However, as is usually the case with a safer investment, AAA insured municipal bonds typically offer a lower return than bonds which carry a AAA without insurance.

Liquidity:
Insured municipal bonds typically trade more on the strength of the insurer than on the underlying municipality, and an active secondary market exists for insured municipal bonds. Thus, there is high degree of liquidity even for small or unfamiliar municipal issues which are backed by bond insurance from one of the major insurers.

Marketability:
Municipal bond insurance increases the marketability of many bond issues, particularly those with more complex security structures or unfamiliar names.

The primary municipal bond insurance companies maintain the highest credit ratings from the major ratings agencies. These insurance companies include:

AMBAC Indemnity Corporation (AMBAC)
Capital Guaranty Insurance Company (Capital Guaranty)
Financial Guaranty Insurance Company (FGIC)
Financial Security Assurances, Inc. (FSA)
Municipal Bond Investors Assurance Insurance Corporation (MBIA)

Reduce the issuer's cost of capital/borrowing costs:
An issuer's interest costs are significantly reduced since bonds which are guaranteed by one of the major municipal bond insurers automatically receive a AAA rating and a higher rating generally means a lower borrowing cost. Generally, a cost/benefit analysis is done by the issuer, financial adviser or underwriter to determine whether the interest cost savings outweigh the cost of the insurance premium.

Increase marketability:
Municipal bond insurance increases the marketability of many bond issues, both at the time of original issuance and in the secondary market.

Enhance security:
As mentioned above, the major bond insurers are all rated in the top rating category (AAA) by one or more of the major credit rating agencies. Thus, the security of a lower-rated bond issue can be significantly enhanced by obtaining a bond insurance guaranty.