Making Decisions About Investing In Municipal Bonds

Some people think that investing in bonds is a safer bet than investing in the stock market; and for the more part, they’re right. But there are some traps that you can get sucked into, specifically in the municipal bond market and this is precisely what I want to speak about in this article today.

Investing in municipal bonds can be tricky, as it is often difficult to determine what the correct price should be. Generally speaking I find that bond valuations confuse the heck out of the average investor because unless you have taken an advanced finance or economics class in bond pricing, then the mathematics may be beyond you. Read the following blog, click here for the rest of the story.

What is so enticing about municipal bonds is that many municipalities offer relatively high tax exempt yields and so you should have a number of them in your investment portfolio no matter what.

Broader Discussion on Investing In Municipal Bonds

But do not get lulled into a false sense of security, as these kinds of bonds have significantly higher risk than your regular money market account even though they’re simply stodgy old bonds. As far as risks go, they’re much riskier than regular US government bonds because US bonds are supported by the full faith and credit of the United States Treasury whereas municipal bonds are not backed up by much of anything. And yes municipalities do go bankrupt all the time so you’ve got to be careful. To learn more insightful information about investing in municipal bonds, visit the following url;

The first risk remains the same risk that all bonds hold, and that’s the interest rate risk. With bonds, when interest rates rise-the market worth of the bond falls because bonds have an inverse relation between yield and price. When price goes up, the yield goes down, and when the yield goes up price goes down.

Bonds can have other risks from market fluctuations to an investor who is obliged to sell them before their maturity date, like stocks and other investments. If an investor is obliged to liquidate his bond positions before their time and the bond’s price has fallen at this time, he’ll lose part of his original investment as well as all future revenue from the interest. Another risk common to all bonds and bond funds is interest rate risk. Interest rates and bond prices have an inverse relationship, so when interest rates in the economy rise, the bond’s price will generally fall and vice versa.

However, bond holders can avoid running the risk of fluctuating interest rates and market risk if they hold on to their bonds until maturity. Bond mutual fund investors should consider these risks more carefully when purchasing into the bond funds they’re interested in because fund managers can potentially buy and sell bonds as they wish to meet the fund’s objectives, on the other hand. Interest rate risks and market risks become more prominent and therefore risk loss because of inherent fluctuations within the bond fund, as a result.

Bond funds also come in many forms each seeking to find a different purpose and therefore buy and sell individual securities to meet their goals. Similarly to individual bonds, different bond funds have different risk factors and benefits such as tax benefits. Some popular bond funds include corporate, U.S. government, and municipal bond funds.

Since U.S. government bond funds are made up of securities backed by the creditworthiness of the U.S. government, they hold almost no credit risk. Nevertheless, they’re still affected by changes in market conditions, interest rates just like all other bonds, as well as inflation risks-not keeping pace with inflation specifically. U.S. government bonds are taxed at the federal level but are exempt from state level taxes. U.S. government bond funds typically appeal to conservative investors looking for steady income streams and solid protection of their principals.

Corporate bond funds aim to invest in a wide range of corporate issued bonds with different credit risks, on the other spectrum. Some companies can potentially have substantial credit risks while others have may have less. In addition, corporate bonds are influenced by interest rate and market risks. Needless to say, the potentially riskier a bond is can mean that it has potentially higher yields; therefore, these investments may be appropriate for investors that can tolerate a little more risk in search of higher interest income.

Municipal bond funds invest in a wide variety of bond issues of state government and municipalities. Municipal bonds are taxed at the state and local and are free from federal taxes. Because of their potential tax benefits, when compared to taxable securities, municipal bonds can be suitable for investors in high federal tax brackets. Municipal bonds are affected by interest rate and market risks also.

Try to match your bond maturities to your investment time frame. For instance, if you’re retired and you require to withdraw from your portfolio each yeah to meet your day-to-day expenses, buy bonds or bond funds with maturities of one year. In addition, depending on your portfolio you can invest portions of your portfolio in intermediate bonds say 5 to 10 year bonds and long-term bonds (10 years +), for higher interest rate payments.

Buy bonds or bond funds with average maturities that range across the maturity spectrum but with heavier concentration in shorter maturities.

The next risk is default, as I already mentioned. Yes it’s true that defaults aren’t very common… but the fact is the same, defaults can and do happen especially in periods of recession like we’re currently in right now in 2010.

Finally, many brokers simply do not specialize in municipal bonds and may steer you the wrong way. Check to see if your stockbroker has a specific musical bond department and if so only deal with them. If they do not, consider finding a company that specializes in municipal bonds just for the part of your portfolio.

Yes, there are risks in municipal bonds but the tax advantages and the higher yields will usually outweigh those risks. As with any investment opportunity, be sure to do your homework before you make an investment decision.


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