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.
Types of Municipal Bonds
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.
Municipal Bond Calculator
A municipal, muni bond calculator is a software system that is used to aid investors such as yourself in calculating as well as monitoring the value of bonds you have bought or are planning to buy. This is particularly beneficial when a financial crisis rolls around and you find it necessary to sell your municipal bonds to make a profit. This software is made available to investors through the Bureau of Public Debt of the US Department of Treasury.
Some muni bond calculators can be used to figure out whether you should invest in municipal bonds or taxable bonds. It is worth noting that the yields on municipal bonds are lower than those on taxable bonds. However municipal bonds do tend to be higher than they would require to be in order to live up to their tax-exempt status. This is not always the way it works however. The only way you can find out is to adjust the municipal yield and take it to the tax-equivalent level. For these calculators you must enter the municipal bond attributes, the taxable bond attributes and the tax bracket/rate. Do a search online for these types of calculators.
The muni bond calculator is a very useful tool for investors. It makes it possible for them to calculate the value of the bonds that interest them before making a purchase and/or it can also be used to calculate the total value and worth of all of the bond investments you currently have. But that is not all these calculators are good for. They can also be used to guide investors in finding the current interest rate of a bond as well as the final maturity date for the bond, the year-to-date interest that has been earned and the following accrual rate. All of this information can be helpful for you as an investor of municipal bonds.
Once you have all of these estimates you can then determine how beneficial these proposed investments really are to you. The calculator can also be used to determine whether or not the gains from the bonds would be exempt from state taxes and federal taxes. If it is necessary for you to pay the relevant taxes then the calculator software will calculate for you how much tax you are required to pay. It is worth noting that when you purchase municipal bonds from the state you live in you are exempt from paying the taxes connected to them. Most of the time the bond issuer will let you know in advance of buying muni bonds whether or not this type of investment is exempt from taxes. If you are not told beforehand then ask.
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