What to Know about Investing in Municipal Bonds
If you’re considering different investment options, municipal bonds may be a viable option. Municipal bonds can be worthwhile if you’re looking for tax-free income streams while preserving capital.
What are Municipal Bonds?
Often called “munis” for short, municipal bonds are issued by various government entities and U.S. territories. There are two varieties of municipal bonds:
- General Obligation Bonds (GO): GO bonds are used to raise capital immediately, which is needed to cover expenses.
- Revenue Bonds: Revenue bonds are issued when government entities need to fund infrastructure projects
Municipal bonds are issued for a variety of reasons. Some examples include the need for new infrastructure, such as schools, water systems, and highways. They may also be issued to help fund day-to-day government needs.
When you purchase municipal bonds, you are essentially lending money to the bond’s issuer, with the promise of regular interest payments, often made semi-annually, and the eventual return of the original investment amount you loaned.
Municipal bonds are issued either as short-term bonds, with a maturity of one to three years, or as long-term bonds, which mature much later, maybe even after a decade or so. Bond principals are fixed, so investors will receive the face value back, along with any interest that may be fixed or floating. If a bond is sold prior to maturation, the investor should receive market value, which may be more or less than the original value. The market value is linked to market forces, like interest rate fluctuations and supply and demand.
Potential Pros and Cons of Municipal Bonds
One reason people are drawn to the appeal of municipal bonds is the way they are taxed. While corporate bonds are typically taxed as regular income, municipal bonds do not have any federal taxes. Some are also exempted from local and state taxes.
Municipal bonds are also considered to be pretty safe and risk-free investment options. These bonds have government backing, although 2008 proved they aren’t completely safe. During the 2008 financial crisis, some of the biggest municipalities filed for bankruptcy, and ongoing issues continue to affect potential municipal bond defaults. One example is the long-term water shortage in California, which prompted the government to enact water conservation methods. That impacts water revenues and the local government’s ability to meet bond covenants.
What to Review Before Considering Munis
Make sure to do your due diligence prior to investing in municipal bonds. Some of the information you can use includes:
- Official Statements: These are any type of disclosure statements that the securities prepare to offer investors information about the particular bond. You should get information about the bond terms, operating data, and other information that is related to the bond’s issuance.
- Continuing Disclosures: These are disclosure documents that provide background information on the bond issuer’s financial status and annual operating data. It will also include information about any activities or events that caused a value change in the municipal bond.
- EMMA Website: The Electronic Municipal Market Access (EMMA) website offers disclosure documents that date back to around 1990, as well as historical and real-time data related to pricing.
Florida Securities Lawyers
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