The beauty of bonds.

• Author: Lizzio, Joseph P.

It is estimated that 1995 will prove to be the largest year for municipal bond redemptions in history. Approximately $230,000,000,000 of municipal bonds will mature or be called. If you are among the many investors facing municipal bond redemptions, now is an ideal time to consider reinvesting your proceeds into additional municipal bonds.

Increased Federal tax rates have underscored the very real and compelling value of tax-free income. Perhaps the most obvious impact of the tax hikes on high-income individual investors is the greater worth that tax-exempt municipal bonds have as a result.

While higher tax rates should continue to make tax-exempt municipal bonds more attractive to all investors, nowhere is the impact more evident than in the higher tax brackets. As high-net-worth individuals seek to shelter more of their income, they will find that municipal bonds are one of the last tax-advantaged investments available to them.

Bonds purchased by residents of an issuing state generally are exempt from state and local taxes as well as from Federal income taxes. Therefore, to take full advantage of tax deferral, look at municipal bonds in your home state. If your state income tax is relatively high five percent or more, for instance), the taxable equivalent yield will become even more attractive on purchases of home state bonds. For example, a six percent yield on a typical 20-year, AAA-rated municipal bond that is exempt from Federal tax will provide a taxable equivalent yield of 8.7% for a 31% ratepayer. In a state that levies a five percent income tax, the same municipal bond would show a taxable equivalent yield of 9.15% if home state exemption is factored in.

The sharp decline in interest rates in recent years resulted in a record number of municipal bonds being called or refinanced. Although less bond refinancings may result in a shrinking supply of municipals as demand increases, the supply/demand balance still is viewed as favorable by many analysts.

Municipal bonds can help you increase your income, plan for the future, and shelter as much of your hard-earned income as possible. In essence, tax-free municipal bonds can be a key building block in a strong financial plan.

As an alternative, conservative investors looking for protection of principal and an attractive level of income might want to consider investing in corporate bond trusts. These unit investment trusts (UITs) are one way for individuals to participate in a portfolio...