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Investing in Municipal Bonds

An overview of the various types of municipal, or government, bonds.

Smart investing means considering the big picture. You may ponder questions like: Are you saving enough from your budget? How's your risk profile? Are you watching trading expenses?

A key investing concept is asset allocation, and many portfolios could use fine-tuning in this area. The right blend of stocks, bonds and other investment products may help cushion your portfolio against bumps and meet your long-term investing goals more effectively. Considerations like value investing versus growth are part of that thinking, too.

Do you know plenty about stocks but nothing about bonds? Don't worry, you're not alone. Here's a quick primer of some of the major bond types, also known as fixed income securities. Please consult with a tax advisor to understand how Fixed Income investments affect your tax. Investing in Fixed Income is subject to market risk and assets may lose value.

Municipal Bonds, or "munis"

State and local governments use municipal bonds (munis) to fund their infrastructure projects, like roads, utilities and other public works.

Depending on where you live, investing in munis from your home state or locality may be 100% tax free - local, state, and federal. On top of that, U.S. citizens can also invest tax-free in municipal bonds from Puerto Rico, Guam and the U.S. Virgin Islands.

Because of their possibly advantageous tax status, munis can be especially useful if you're in a high income-tax bracket.

Treasuries, or "T-bills"

Widely regarded as a virtually risk-free investment, Treasuries (T-bills) mature in one year or less. T-bills don't pay periodic interest; rather investors purchase a T-bill at a discount to its face-value price and then receive the full face value at maturity.

T-bills are issued weekly with maturity dates of 28 days (about a month), 91 days (about 3 months), 182 days (about 6 months), and 364 days (about 1 year).

Certificates of Deposit, or "CDs"

Another type of fixed income strategy is a Certificate of Deposit (CD) which is a potentially good place to park uninvested cash. CDs are often times a short-term loan, usually made to a bank. As the investor, you lend some cash to the bank, which then pays you an interest rate in return. Some CDs do not pay periodic interest. This kind of CD is issued at a discount to face value and then gradually accumulates interest due until maturity. Other types of CDs provide the investor with a regular interest payment. At the end of either investment's term, called "maturity", you'll get all your cash back ("principal") plus any remaining interest earned depending on the type of CD. Many CDs are FDIC insured, but not all. Be sure to understand the risks fully before committing to any investment.

Here's a helpful rule-of-thumb for CDs and other bond investment strategies: the longer your money is out of your hands, the better the interest rate you earn is likely to be. That means the interest rate paid on a 30-day CD will usually be lower than a 30-year bond. Think of it this way, the longer you are willing to part with your money, the more interest you should receive.

Finding the right CD or muni for you

TradeKing's Fixed Income Center connects you to over 200 dealers offering about 35,000 fixed income securities, or various kinds of bond. We also offer 250 - 500 new CD offerings weekly through 10 different dealers.

Answer five simple questions with our Bond Finder about what you're looking for, and we'll instantly find products matching your criteria for time horizon, tax status, credit rating and product type. Interactive tables show you a snapshot of the overall bond market; just click on a yield to start searching for products that deliver that yield. Although our Bond Finder may help you find fixed income investments, ultimately you must decide whether or not to make any investment.

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A nationally licensed online broker, TradeKing aims to help investors become smarter and more empowered in stock, options and bond investing. At TradeKing we offer the same fair and simple price to all our clients - just $4.95 per trade, plus 65 cents per option contract. You'll trade at that price, no matter how often you trade, or how big or small your account may be.

SmartMoney Magazine named TradeKing the best discount online broker in 2006 and 2007 and awarded us #1 for customer service from 2008 through 2010. The SmartMoney survey compares brokerages based on criteria including customer service, trading tools, commissions, interest rates, research, investment products, mutual funds and banking amenities.

Fixed-income investments are subject to various risks including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

TradeKing's Fixed Income platform is provided by Knight BondPoint, Inc. All bids (offers) submitted on the Knight BondPoint platform are limit orders and if executed will only be executed against offers (bids) on the Knight BondPoint platform. Knight BondPoint does not route orders to any other venue for the purpose of order handling and execution. The information is obtained from sources believed to be reliable; however, its accuracy or completeness is not guaranteed. Information and products are provided on a best-efforts agency basis only. Please read the full Fixed Income Terms and Conditions.

Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content on TradeKing's website, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.

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