The Basics of Municipal Bonds Investing

In these uncertain economic times, many investors are seeking safer alternatives to the stock market. Municipal bonds, or munis as they are commonly known, are similar to other bonds in most aspects, except that they are issued by city or local governments, or their agencies below the state level.

One significant difference from stocks is that they can be traded any time once they are purchased by the investor, unlike stocks which come to market with price restrictions until the deal is completed. Municipal bonds are most often issued as a sort of i.o.u. by government agencies to raise funds for roads, schools, or, hospitals.

Municipal bonds prices are at near record lows, coupled with very high yields making for a very attractive investment option. Municipal bond yields are at very high levels some topping 6% for long term, and many financial analysts believe the market is undervalued.

Municipal bond yields have not been hurt by the selling pressures of hedge funds, issuers of structured notes and mutual funds. Historically these bonds have had much better credit than corporate bonds, even during the great depression no state defaulted on its general obligation bonds.

Muni bonds normally come in two types, general obligation and revenue. General obligation bonds are supported by the taxing power of the issuer and must be voter approved, while revenue bonds are secured by revenue from the project they are funding or revenue from the issuing agency.

Careful reading of municipal bonds quotes will give an investor a good idea if a particular bond will be right for them. Municipal bonds quotes contain a bid and an offered price, most quotes are representative and show the estimated value of the bond.

Low municipal bonds prices coupled with high yields aren’t the only factors which make them an attractive investment. A major attraction for some investors to these bonds is the fact that they are exempt from federal income tax, and depending on the local laws, they are also exempt from state and local taxes if you live in the state or municipality where they are issued.

Tax-free municipal bonds can be a great alternative in these uncertain economic times, due to their stability in the face of the current credit market woes. Just to give you an idea, a taxable investment yielding 6.92% would be required to equal a tax-free bond yielding just 4.5%.

Many investors use tax-free municipal bonds to preserve capital while generating tax-free income, if you have a heavy enough marginal tax rate, these bonds can help protect you from it. Muni bonds have a traditionally had a very low rates of default due to the fact they are backed by revenues from utilities or state and local governments ability to collect taxes.

However, after the mortgage crisis of 2009 declining property values have caused significant drops in local revenues, so they are not without risk. Remember that there are some instances, depending mostly on your tax bracket or where you purchased them, where the muni bonds could have their profits subject to taxes. Remember, never invest in anything without consulting investment and tax professionals you trust.

Related Articles

Back to top button