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The 30-year T-Bond, also known as the long bond, is the benchmark used by many to gauge the relative strength of the bond market.While most government bonds are marketable (i.e., they can be traded in the open market) some such as savings bonds are not. Government bonds are the safest types of bonds around since they are backed by the full faith and credit of the federal government. As such their yields are generally lower than other types of bonds given the same maturity time length. The interest on Treasury bonds is subject to federal tax but is exempt from state or local taxes.

Municipal Bonds (Munis) — These are bonds issued and sold by local governments such as towns, counties, and states, and they are backed mostly by the future taxes received by the local governments. There are basically two types of munis: general obligation and revenue bonds. General obligation bonds are backed by the credit and taxing authority of the issuer, such as states or towns, while revenue bonds are secured by revenues derived from a certain project, such as hospitals or toll bridges. Munis are sometimes offered in $5,000 units with varying maturity lengths.

You may be tempted to think that munis are just as safe as the government bonds. In some cases they are not, and their quality varies depending on the issuing municipalities. In any case, most munis are also rated which is a great indicator of their safety levels. While many munis have good qualities , investors have lost money with them. As an example, one of the largest cases of this was the recent Orange County bankruptcy in 1994 which caused it to default on its bonds. Some munis maybe insured by private insurance companies. This would add an extra level of safety to them, attracting more investors. The interest on munis is exempt from federal tax. It is also exempt from state or local taxes if issued in the state of residence. …