The title of an article written by Andrew Hollander for the Stoever Glass & Co. municipal bond letter in July is "The Many Faces of Aaa." Several good points in this article are worth repeating. What Hollander does is to compare the various types of high-grade Aaa municipal bonds and to rank them according to their relative strengths. Seems funny to be able to do this within the Aaa category, but it is certainly valid. In descending order of their strength, the Aaa ranking would be as follows: issues backed by U.S. Treasuries; issues backed by federal government agencies; "natural" Aaa's (i.e., general obligation bonds of states and municipalities); insured Aaa's (i.e., AMBAC, MBIA, FGIC and so forth) and, lastly, municipals secured by an Aaa-rated bank's letter of credit. Of all of these quality issues, it would be of most interest to explore the top of the line, the issues that are backed by U.S. Treasuries. Treasury-backed municipals are created from already existing or outstanding lower-rated municipal issues. What happens is that the issuer of the outstanding bonds will authorize the sale of a new issue whose proceeds then are used to purchase U.S. Treasuries, which are placed in an escrow account. The purpose of the escrow account is to pay off all of the interest and all of the principal of an outstanding issue. There are two courses of action that the issuer then may take, depending on the structure of the original outstanding issue. If the original outstanding issue has a date on which it may be called in or retired, the Treasuries then will be set aside to retire that issue at the first possible call date. In this instance, they will become known as pre-refunded (P-R) bonds, and that old issue, which is now backed by Treasuries, will be retired in its entirety at the first call date. In the other instance, the Treasuries, which are held in escrow, may be used to back the outstanding issue all the way to maturity. These bonds then will be known as escrowed-to-maturity (ETM) bonds. In both instances, if the issuer applies to the major rating agencies for a change of rating, the new P-R and ETM bonds will be rated Aaa by virtue of being backed by U.S. Treasury securities. At this point, it is worth comparing these Treasury-backed municipals against similar maturities of Treasuries. Currently, a two-year Treasury is returning 8.80 percent, while a two-year ETM issue is returning 5.50 percent. For a person in the 50 percent tax bracket, that translates into a taxable equivalent of 11.00 percent (versus a taxable 8.80 percent on the Treasury). Similarly, a 10-year P-R is returning an 8.00 percent tax exempt yield, which is equivalent to a 16.00 percent taxable yield for the investor in the 50 percent bracket. The 10-year Treasury, meanwhile, is returning a taxable 10.10 percent. Depending on the investor's tax situation, these figures show that it is certainly worthwhile to look into U.S. Treasury-backed P-R and ETM bonds as investments, compared with either taxable Treasuries or, in some instances, with the other type of Aaa municipals. The Treasury will offer a 5-year, 2-month note Wednesday, which will be available in minimum denominations of $1,000. They should return 9.60 percent.