In screening for bonds, the first thing you need to do is determine which type of bond you are looking for. Among the types you can choose from are: U.S. Government Securities (treasury and zero coupon), corporate bonds and municipal bonds. These are briefly described below:

Treasury
Treasury bonds are issued by the United States government. They are generally regarded as being the safest of all bonds in terms of default risk, although all bonds have market risk if they are sold prior to maturity. Treasury bonds are taxable at the federal level, but they are state tax exempt. They pay interest twice a year, and they are available in maturities ranging from less than one year to 30 years.

Treasury Zero Coupon
Treasury zero coupon bonds are zero coupon bonds issued by the United States government. These bonds do not pay interest during the life of the bond and are bought at a discount to the maturity value. For example, you might pay $700 today to get back $1,000 in 5 years. The difference between what you pay now and what you receive in the future is your return.

If treasury zero coupons are not held in a qualified plan, they are taxable each year based on how much income has accrued. Therefore, even though you get no cash, you do have to pay tax. Treasury zero coupon securities include:

CATS - Certificates of Accrual on Treasury Securities
TIGRs - Treasury Investment Growth Receipts
STRIPS - Separate Trading of Registered Interest and Principal of Securities

Corporate
Corporate bonds represent debt of corporations. The bonds are fully taxable, and they are issued in maturities ranging from less than one year to about 30 years (although there are a few corporate bonds that mature in more than 30 years). They typically pay interest twice a year. Corporate bonds can be quite safe when they are issued by strong companies, or they can have significant risk of default when issued by weak companies. Ratings from two agencies, Moody's and Standard & Poors, are shown on the bond profile pages. Please see the section on selection criteria for a complete description of safety and default risk.

Municipal
Municipal bonds are issued by state, county, or city governments. They are generally exempt from federal tax, and are generally state tax-free for residents of the state in which they are issued.

Municipal bonds pay interest twice per year. Like corporate bonds, municipal bonds can be very safe or they can carry considerable risk of default. Moody's and Standard & Poors rate municipal bonds as to credit quality, so it is possible to select safe bonds by relying on the ratings. Also, many municipal bonds carry third party insurance from very large insurance syndicates, and these insured bonds are generally regarded as being very safe from default risk. Like all bonds, municipal bonds are subject to market risk if sold before maturity. It should also be noted that though interest is tax-exempt, any capital gains are taxed at the appropriate levels.

The state that you live in is important when buying municipal bonds. Most states do not tax their residents on income earned from municipal bonds issued from within that state. For example, if a California resident buys a bond that was issued by the city of Los Angeles, the resident would not pay federal or state tax. However, if an Arizona resident buys the same bond, the Arizona resident would have to pay state tax because he or she resides in Arizona but the bond was issued in California.

Although this is the general rule, there are two situations where it does not apply. Some states do not have any state income tax. Therefore, residents of these states can buy bonds from any other state without having to pay state taxes. Some other states tax their residents on municipal income, even if the bond was issued from within the state. In those situations, the resident must pay state tax, regardless of which state issued the bond, so these residents could buy bonds from any state.