State, city and local municipalities usually finance borrowings by issuing triple net tax free securities in the bond market. Triple net tax free refers to bond interest payments on such securities being free from taxation at the local, state and federal level. Most, but not all, municipal securities are issued with such exemptions. As you might expect, the benefit of earning tax free income has a price; coupons are usually lower than fully taxable securities. However, investors should not be dissuaded from investing in munis (the trade vernacular for municipal securities) because of optics. Historically there have been long periods in which an “apples to apples” comparison of taxable and tax free market yields have produced environments in which municipal securities offer relative attractive valuations despite their modest coupons. Such a comparison requires use of a simple algorithm to convert tax free yields into fully taxable yields; FINRA has such a calculator.

While the last few years have been unpredictable for the markets, the municipal market have been resistant the worst of the credit crisis. The graph below illustrates that boring municipal bonds can provide reasonable risk adjusted returns compared to more well-known (read: media reported) asset classes.

There are numerous web sites on the Internet providing a reservoir of information on the municipal securities and investing. We don’t need to replicate information that is readily available in the public domain. For the interested readers wishing a more thorough primer, we recommend Investing in Bonds.