Municipal bonds, also known as muni bonds or munis are bonds that are issued by local governments (cities and counties) and state governments to raise capital for community activities and projects such as building or repairing hospitals, highways or schools. Investing municipal bonds is a popular investment strategy for those who are looking for a fixed source of income over an intermediate period to a long-term period.
One of the greatest draws of municipal bonds is that the interest paid on the bond(s) is exempt from any federal taxes. The investor is also exempt from state taxes as long as the municipal bond was issued in the same state that the investor lives in. One of the other advantages is that they are a safe and virtually risk free type of investment. The only way that an investor would lose his or her investment is if the government fell, making bonds a secure investment for beginner investors .
Investing in municipal bonds are generally considered appropriate instruments when preservation of capital is a primary concern. Municipal Bonds are debt obligations issued buy governmental entities to generate capital to build, highways, schools, bridges and other infrastructure. Municipal bonds are issued in two varieties, general obligation bonds and revenue bonds. Depending on the individual investors municipal bonds can be a supplement to investing in stocks or a more primary investment.
There are two different types of municipal bonds. If you are thinking about investing municipal bonds then the distinction is worth knowing.
The first type is known as general obligation bonds (GO) while the second is known as revenue bonds. GO bonds are issued in order to pay for such projects as schools and sewer systems. As a general rule most investors feel that general obligation municipal bonds are safer than revenue municipal bonds.
Revenue municipal bonds are bonds that are issued by special state or government sanctioned companies that operate locally such as a utility company. The interest on these bonds is paid by the revenue that comes from the company that backs the obligation. For example if the utility company is a water company then the bond holders are paid interest from the money that customers use to pay their water bills.
While purchasing municipal bonds does tend to err on the side of a conservative investing strategy, it is not completely without its risks. It is important to research these risks thoroughly before you jump into the municipal bonds market. These risks include credit risk, interest rate risk, call risk, market risk and tax bracket changes.
The very basic strategy for investing municipal bonds is to buy a bond that has a very attractive yield or interest rate and to hold the bond until it reaches its maturity date. For those investors who wish to move to the next level they can create a municipal bond ladder. A ladder is made up of a series of bonds. Each ladder has a different interest rate as well as a different maturity date.
Who Buys Municipal Bonds
Everyone can municipal bonds although not everyone does. Municipal bonds are tax exempt from federal income tax and in many cases exempt from state and local taxes.
Investors seeking high yields sometime shy away from municipal bonds. However consider that municipal bonds that yield a 5 percent tax-free return is the equivalent of a 8 or 9 percent taxable return.
Are Municipal Bonds A Safe Investment
Municipal bonds are assessed by credit ratings similar to corporate bonds. Bonds rated ‘BBB’, ‘Baa’ or better are generally considered the safe instrument. As is the case with all investments, the higher the reward, the yield, the higher the risk. Eliminate government entities that are not thriving communities
Are Municipal Bonds Right For You
Generally investing in Municipal bonds is viewed as a conservative investment. Do not consider municipal bonds risk free. Risks in investing in municipal bonds include credit risk and price fluctuations. However a properly balanced portfolio should include a position on bonds, Investments in bonds should be fit your personal investment objectives. Municipal bonds are priced at $5,000 apiece and increase in increments of that same level Municipal bonds may be purchased directly from the issuer at the date of issue or in the secondary market through a broker/dealer.