Municipal Bond Investing
Municipal bond investing – What are the advantages and disadvantages of investing in municipal bonds? A thorough analysis of the benefits and risks involved in municipal bonds.
Municipal bonds are investments into bonds issued by the government. This is extremely stable. The most common type of municipal bond would be that in US Treasury Bills.
Advantages of Municipal Bonds
Municipal bonds will be excellent investments for you if your main investment objective is to preserve your capital and enjoy a tax-free stream of income. Municipal bonds have both taxable and tax-exempt variations, though it is the latter which most investors prefer, as it is free from federal, state and even local tax obligations.
Municipal Bonds: General Obligation Bonds
The first type of municipal bond is the general obligation bond, which is used to raise quick capital to cover expenses. These general obligation bonds are supported by government taxation.
Municipal Bonds: Revenue Bonds
The second type of municipal bond is the revenue bond, which is used to finance infrastructure projects. These revenue bonds are supported by government revenue from these infrastructure projects.
Risks of Investing in Municipal Bonds
What are the risks associated with municipal bond investments?
While there is a high likelihood that the bond issuers will pay full interest and meet its financial obligations on maturity, this is not guaranteed. Before investing in municipal bonds, you should pay clear attention to the rating agencies’ issue ratings on the bond issuer’s ability to meet its obligations. ‘AAA’ ratings represent the most creditworthy bond issuers, while bonds rated at least ‘BBB’ or ‘Baa’ are generally safe investments where there is minimal credit risk.
This is a significant risk, as municipal bonds usually pay fixed interest rates over the life of the bond. That means that if the market interest rates rises over the life of the bond, you will be earning less than those holding new bond issues.
In some cases, the issuing entity may choose to retire the debt on the bond at an earlier date. That means that your initial investment will be returned, along with a premium. However, that also means that your income stream from the compounding interest will end.
Municipal Bond Investing
Generally, municipal bond investments involve passive investment strategies, where you wait to purchase municipal bonds at an attractive interest rate, then hold the bond until it matures. Other investment strategies include the creation of a municipal bond ladder – or for the more active investors, you can choose to buy and sell bonds depending on market variations.