Investing In Municipal Bonds

Most commonly issued by local governments, municipal bonds can provide solace to investors during an economic recession, as they are putting their money into something local and tangible. Muni bonds are essentially loans. The issuer of the bond, usually a city, county or state municipality, borrows money from the investor (or purchaser of the bond), thus being obligated to pay interest (also referred to as a “coupon” in the finance world) to the investor within a certain timeframe. Most often, interest on municipal bonds is payable semi-annually.

A municipal bond, also endearingly referred to as a "muni," is a liquid entity, which means it can be bought or sold at any time, and the silver lining for most investors is that the federal government cannot tax the interest collected. Moreover, it can also be exempt from many local taxes.

Additionally, the municipal bond investor can be exempt from state taxes if they maintain residence within the same state where the bond was issued. These tax-related incentives make investing in municipal bonds attractive to those within the higher income tax bracket, as the higher the bracket, the greater the benefit of tax-free income.

General Obligation Municipal Bond

Municipal bonds are often issued by the agencies of a local government and are paid out to holders in full faith, in what is known as a “general obligation bond.” It should be noted that this highly common type of municipal bond generally yields lower interest rates for investors. A county or city government may issue munis for the purpose of maintaining infrastructure, funding expenditures (e.g. construction of parks, roads, sidewalks, etc.), and paying government-funded entities.

Other Types of Municipal Bonds

In addition to general obligation bonds, there are other types of bonds for investors to consider adding to their municipal bond portfolio:

·         Revenue Bonds

Payment is made exclusively through revenues generated by entities associated with the bond (e.g. electric or water utilities). The type of revenue will be stated explicitly in the contract agreement between the holder and issuer.

·         Assessment Bonds

The issuer pays interest generated from property tax. A local government may institute an assessment bond to fund the creation of a new sidewalk or park, raising property taxes in the process.

Bond values generally fluctuate in accordance with the financial market: When interest rates are up, the tax yield goes up. To keep track of these trends and maintain awareness concerning what municipal bonds are currently available, it is advisable to read the financial section of one’s local newspaper. Furthermore, The Wall Street Journal is always an excellent resource for investors. One may also consult a licensed brokerage for information and guidance. Additionally, it never hurts for a prospective investor to personally contact the issuer to discuss the finer details pertaining to the municipal bond.