Municipal bonds can be thought of as loans that the investors create to local governments. Cities, states, counties, or other local governments are the usual issuer of these bonds. As a result, interest from these bonds is not taxable. The municipal bond market made $3.8 trillion in 2018.
Municipal bonds are also equities. Any other investors can purchase these bonds from the original owner through the secondary market. Thus, this causes the prices of bonds to shift. The interest rate and the return on investments for these bonds are not changeable regardless of the length of owning one.
There are three types of bonds as stated by the Securities and Exchange Commission. First is the General Obligation Bond that is the most widely used municipal bond. It comprises 60% of the overall Municipal bonds. Payment for this bond is made through utilizing current tax revenue.
Second, the Revenue Bonds. These bonds are used in funding revenue-generating projects such as toll highways, sports arenas, or city-sponsored developments. In case that the sources of revenue, the municipality is not obliged to pay. The municipality pays back those with earnings from a particular source. It comprises 40 % of the total Municipal bonds.
Lastly, bonds that are created for the sake of private groups having public purposes such as non-profit colleges and hospitals. The municipality merely organized the sale of the bond but is not accountable for the said debts if in case there is a failure of payment by the private entity.
Generally, investors received interest payments from their municipal bond two times a year. Principal amounts are repaid by the bond issuer on the maturity date of the bond, which is every 3 years for short-term bonds while for long term bonds it takes 10 or more years.
Important: Municipal bonds are a better option for investors who are looking for tax-free revenue flow.
Typically, these investors are individuals belonging to a higher revenue-tax bracket. The purchase of municipal bonds can be made straight from a bond seller which is municipally registered. Another way of acquiring it is by a municipal bond fund.
In previous years, only minimal cities were unable to make the required payments on their debt obligation, thus it is thought of as a low-risk investment. The majority of the private municipal bondholders refuse to sell their bonds within the bond’s life, except for those who found out that the price of the bonds is shifting in accordance with the supply and demand in the market.
The rates of municipal bonds rely on three components, similar to any other bonds. The majority of the bond rates conform to the corresponding Treasury bond yields. It was made by the federal government and considered free of risk bonds. Muni bonds have slightly higher interest payments because it is a little bit risky compared to federal bonds.
The credit rating of the municipality will also affect the rates of bonds. Municipalities gaining AAA credit rating (highest) are said to be the most secure, thus they also pay the least rates. In order to indemnify investors for the higher risk of default for low-rated bonds they offer higher interest rates in return.
The yield will shift based on the term of the bond. Short-term bonds (less than 10yrs) pay lower compared to Long-term bonds having lengthier maturity (10-30 yrs.) which constitute a higher pay. It is fair for investors to anticipate higher returns for investing their money in the long term period.
It is highly recommended to ask help from a financial planner in order to identify the best bond that will suit your financial goals.
Municipal bonds were purchased by the majority of individuals through a financial advisor, bank, or acquiring it straight to the municipality. Moreover, by using bond funds a large number of individuals take advantage of municipal bonds.
If you need more information about the municipal bonds you can access directly the Electronic Municipal Market Access website. Every type of bonds, yield, and maturity will be shown on the website. Furthermore, it will provide info on the bond's credit nature, risk components, and audited financial statements.
It has searching options that allow you to find bonds within your location. It also gives statistics and has the capability to compare prices on bonds and have the latest calendar issue. This site is best for you if you are planning to purchase a large number of municipal bonds.
Daniel P Vigilante CPA and Profit Consultants