Munis, as they’re called, are very popular for their tax-free advantages. States, cities, towns, municipalities, and government entities issue them to build schools, parks, and numerous other important aspects of our communities. In exchange for your willingness to lend money to help with such worthy ventures, you not only receive interest on your loan, but your bond is usually exempt from federal and often state taxes. That last part is what catches people’s attention, since most other investments have Uncle Sam camped on your doorstep waiting to take a bite.

The yields on municipal bonds generally won’t pay as much as those on their corporate counterparts. However, when you consider the yield after taxes are paid from corporate bond earnings, the munis often don’t look too bad, particularly in states with high taxes. You do need to report tax-exempt interest on tax returns for record-keeping purposes.

Not unlike corporate bonds, many municipal bonds are also rated, and those with the highest ratings rival only the government bonds in their low degree of risk. Companies such as Standard & Poor’s, Moody’s, and other investment services grade the bonds in the same way they grade corporate bonds. AAA (S&P) or Aaa (Moody’s) are the top grades. Look for bonds with a grade of at least BBB or Bbb. As with corporate bonds, the lower the grade, the higher the risk. To ensure safety, you can get your investment secured, or in this case insured, so that you cannot lose your principal and interest due.

Municipal bonds cost $5,000 or a multiple of $5,000. Yields vary, like other bonds, based on the interest rates. Actual prices for traded bonds will be listed in the financial pages. Prices will vary based on the size of the order of bonds traded and the market. Like other bonds, you can sell a muni on the secondary market and, depending on the current rate, receive a higher price than what you paid for the bond. However, if you sell a municipal bond and show a capital gain, the taxman will cometh.

If you are interested in munis, you should get to know the options available to you. Municipal bonds come in a few different types, including the types on the following page:

Revenue bonds. These bonds are usually issued to fund a specific project, such as a bridge, an airport, or a highway. The revenue collected from tolls, charges, or in some manner from the project will be used to pay interest to bond holders.

Moral obligation bonds. This is essentially a revenue bond offered by a state but with a unique twist. These bonds are typically issued when a state may not be able to meet the bond obligation through its normal revenue stream, which includes taxes and licenses. Just in case, the state forms a special reserve fund that can be used to pay the bond obligation, but there’s no legal obligation for them to use that reserve fund; just a moral obligation. In most cases, this moral obligation on which a state has staked its good reputation can be even more powerful than a legal one.

General obligation bonds. The issuer backs up the interest payments on these bonds by taxation. Known as GOs, these bonds are voter approved, and the principal is backed by the full faith and credit of the issuer.

Taxable municipal bonds. Why would anyone want a taxable muni if nontaxables exist? Simple: They have a higher yield more comparable to corporate bonds, generally without much risk. Such bonds can be issued to help fund an underfunded pension plan for a municipality or to help build a ballpark for the local baseball or football team.

Private activity bonds. If a bond is used for both public and private activities, it is called a private activity bond.

Put bonds. These bonds allow you to redeem the bond at par value on a specific date (or dates) prior to its stated maturity. Put bonds typically come with lower-than-average yields in exchange for this flexibility, but they can make a good strategic purchase for active bond traders who expect a jump in interest rates. When rates rise sufficiently, they can cash in the put bonds (usually at par value) and reinvest in higher-yielding instruments.

Floating and variable-rate municipal bonds. If it appears that the rate of interest will rise, then these are good investments because they will as the name implies vary the interest rates accordingly. Naturally, there’s a greater interest risk involved with such bonds.

You can usually find prices of municipal bonds being traded in the financial section of a major paper or in a financial publication. Municipal brokers can then give you their own price quotes. The current market price will vary often, so if you want to buy (or sell), you need to stay on top of the current market price.