Tax Exempt Municipal Income Trust, Series 318
Municipal Bond Basics
A municipal bond is a debt obligation of a state and/or local government entity which is used to help
build America’s infrastructure by raising money to finance public projects such as new hospitals, schools
and improved roads. In return, investors in tax-exempt municipal bonds receive earnings which are free
from federal income taxes and, in some cases, state and local income taxes. Because of their low
correlation to many other fixed-income and equity assets, municipal bonds can also provide
diversification benefits within an investor’s portfolio.
Municipal bonds have historically had a very low overall default rate as compared to corporate bonds.
According to data from Moody’s, the historical default rate of Moody’s-rated municipal bonds is lower
than that of corporate bonds in every rating category. In fact, despite the economic struggles facing
many states and municipalities, investment grade municipal bonds have experienced significantly lower
default rates than even the highest rated corporate bonds.
One reason for the historically lower default rates has been the relatively more stable revenue streams
of municipalities, which have the ability to levy taxes to offset declining revenues. Corporate revenues,
on the other hand, can be more volatile as they have fewer ways to increase revenues during difficult
economic periods. Of course, given the current economic environment, there can be no assurance that
the default rate for municipal bonds will not rise or that volatility will not increase.
Tax-exempt municipal bonds provide investors with significant tax savings. For investors in higher tax
brackets, municipals can offer greater after-tax yields than taxable debt securities of similar maturities
and credit quality, including Treasuries and corporate bonds. Taxable-equivalent yields represent the
amount of pre-tax return an investor would need to earn in a taxable investment in order to equal that
of a tax-exempt investment. The chart below illustrates the taxable equivalent yield at five
different federal income tax levels using a tax-exempt municipal bond with a 4.00% yield as an
example. As you can see, if an investor is in the 22% federal tax bracket, the 4.00% yield has a taxable
equivalent yield of 5.13%. In other words, an investor would need to get a 5.13% yield from a taxable
bond to equal the 4.00% payout of the tax-free municipal bond.
- Federally tax-exempt monthly income.
- Investment grade bonds.
- Interest on the bonds is exempt from the alternative minimum tax.
- Estimated weighted average maturity of approximately 25 to 30 years.
- 3.50% up-front maximum sales charge. In
addition to the sales charge, the trust is
subject to annual operating expenses and
The objectives of this unit investment trust are to distribute income that is exempt
from federal and, in certain instances, state and local income taxes and to preserve
capital by investing in a portfolio of investment grade tax-exempt municipal bonds.
There is, however, no assurance that the objectives will be achieved.
| Not FDIC Insured Not Bank Guaranteed May Lose Value
You should consider the portfolio's investment objectives, risks, and
charges and expenses carefully before investing. Contact your financial professional
or call First Trust Portfolios, L.P. at 1.800.621.1675 to request a prospectus,
which contains this and other information about the portfolio. Read it carefully
before you invest.
An investment in this unmanaged unit investment trust should
be made with an understanding of the risks associated with an investment in municipal bonds.
Municipal bonds are subject to numerous risks including rising interest rates, economic
recession, deterioration of the municipal bond market, possible downgrades, increased volatility,
reduced liquidity and defaults of interest and/or principal.
Certain of the securities in the trust are covered by insurance policies obtained by the issuers or
underwriters of the bond from insurance companies. There can be no assurance that any
insurer will be able to satisfy its commitments in the event claims are made in the future.
This UIT is a buy and hold strategy and investors should consider their ability to hold the trust
As the use of Internet technology has become more prevalent in the course of business, the trust
has become more susceptible to potential operational risks through breaches in cybersecurity.
The COVID-19 global pandemic has resulted in major disruptions to economies and markets around the world. Financial markets have experienced extreme volatility and severe losses, negatively impacting global economic
growth prospects. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty and may exacerbate other political, social and economic risks.
The value of the securities held by the trust may be subject to steep declines or increased volatility
due to changes in performance or perception of the issuers. The markets for credit instruments,
including municipal securities, have experienced periods of extreme illiquidity and volatility.