It is important to remember that investment objectives, and the best strategies for achieving those objectives, depend on an individual investor's particular circumstances. The tax advantage investors reap from tax-exempt securities will vary according to their income level.
- Credit Risk - Risk that the issuer is unable to pay scheduled principal and interest on a timely basis. To evaluate the credit quality of an issuer, examine its credit rating and review the Preliminary Official Statement of the offering, which contains detailed financial information of the issuer.
- Interest Rate Risk - When interest rates decrease, bond and note prices increase, and when interest rates increase, bond and note prices decrease. Interest rate risk is the risk that changes in interest rates may reduce (or increase) the market price of a security. For investors who own a bond or note until its maturity, interest rate risk is not a concern.
- Creditworthiness - Some but not all municipal bonds have been rated by various rating agencies. A standard credit rating is supposed to be an independent assessment of the creditworthiness of the bonds. Since the global economic turmoil of 2008, the major credit rating agencies have been the focus of government scrutiny as to the objectivity of their ratings. That said, a credit rating is suppose to measure the probability of timely repayment of principal and interest of a bond or note. Higher credit ratings indicate the rating agency's view that there is a greater probability the investment will be repaid.
- Interest Rate - The State pays interest to investors in exchange for the use of the loaned money. The interest rate is a percentage of the principal (the amount borrowed), accruing over a specified period. Interest on bonds or notes with fixed interest rates typically is compounded and paid semiannually. Interest on bonds or notes with variable interest rates accrues at a rate which changes periodically based on specific criteria.
- Price - The price is the amount investors are willing to pay based on certain variables, including current market yields, supply and demand, credit quality, maturity and tax status. Keep in mind that price and yields move in opposite directions. When market yields increase, the value of a bond or note decreases, and vice versa.
- Yield - The yield generally refers to the return an investor earns on the bond or note. The yield is calculated in two ways: based on the market price and interest rate; or by taking into account a number of factors, including interest rate, market price, maturity date and the time between interest payments. Investors should consult their brokers or other financial advisors to learn more about yield.
- Maturity - Maturity is the date when the principal on the bond or note is scheduled to be repaid to the investor. The State generally sells bonds that have maturities between 1 and 30 years. In general, the further out the maturity date, the higher the investor's yield.
- Redemption Provisions - Some bonds or notes contain provisions that allow the State to redeem, or "call," all or a portion of the bonds or notes, at specific prices, prior to their maturity dates. Bonds frequently are called when interest rates are lower than when the State sold the bonds. Bonds or notes with redemption provisions usually offer investors higher yields to compensate for the risk that the bonds might be called early. When the State calls a bond or note, it pays the holder the principal amount and any interest earned since the last interest payment. However, the holder does not receive the interest that would have been earned if the bond had been allowed to reach its maturity date. Holders of callable bonds or notes are notified of impending calls.
A secondary market transaction does not involve the issuer, but is a transaction between two investors - a buyer and a seller. Secondary market transactions involve a brokerage firm which acts either as a liaison between the buyer and seller, or as a buyer or seller itself. Buyers pay sales commissions to brokerage firms to compensate them for their services in facilitating the transaction. Market conditions, such as prevailing interest rates, supply and demand, and credit quality, among other variables, determine the price, which likely will differ from the original price.