Municipal bonds

Municipal bonds
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Municipal bonds

Municipal bonds (muni) are debt issued by government agencies, whether central or local. Municipal bonds holders will receive interest and principal payment on the maturity date previously agreed. Interest income can be earned each month, three months and semester, and so on until the end of the period. Municipal bonds may be taxable and tax-exempt format. For tax-free municipal bonds, most are very quickly to be sold or preferred by the buyers.

There are two types of municipal bonds:
- General obligation bonds (GO)
- Revenue bonds

General obligation bonds (GO) are issued to get the immediate fund for expenditure of issuer. Revenue bonds used to build infrastructure that can get return that would come from such development. Both types of bonds are highly favored by investors because the tax-free and guaranteed return.

Some risks
Purchase of municipal bonds are considered as conservative investment that also has risks, among others:

Credit Risk: This can occur if the issuer fails to fulfill payment of obligation, because of the failure of the interest payment schedule or failed to pay the loan principal at maturity date. Rating institution like Moody's Investors Service and Standard & Poor's may help to consider the issuer's ability to fulfill obligation in debt. Many bonds are guaranteed by the insurance to provide security for investors.

Interest-Rate Risk: The majority of municipal bonds provide a fixed interest rate during the life of the bonds. If the market interest rate rises then investors will get a yield relatively lower than the yield from the new issue of municipal bonds.

Tax-Bracket Change: Municipal bonds generate tax-free income. The interest payment is usually lower than the taxable municipal bonds.

Call Risk: Many bonds can provide opportunities to the issuer to pay off some debt of the bonds before maturity. Capital of the investor is returned with additional money resulting from the earlier settlement. So the next revenue will have settled prior to maturity.

Market risk: certain bonds prices change with market condition. When interest rate fall, the newly issued bonds will give to lower result than the existing ones, so the old bonds are more attractive to investors. And vice versa. However, if investor hold bonds until maturity, then there is no market risk. If you sell municipal bonds before maturity date then the gains from the sale will be taxed.

Buying Strategies

The main strategy in investing is to buy municipal bonds that have high interest rate or yield and maintain until maturity date.

Do you really need municipal bonds?
Investing in municipal bonds require a long time in getting income, for that, look for more detail information from experts, before deciding to buy municipal bonds.