Municipal bonds may be right for you if you are in a higher tax bracket. In general they are exempt from federal and in some cases state and local income tax depending on whether you are a resident of the state that issued the bond.*
Tax-exempt municipal bonds offer a tax advantage for funds not invested in an already tax-advantaged account, like an IRA.
Municipal bonds have little correlation to stocks and high-yield bonds and therefore could be used to potentially increase credit quality and diversify portfolios. (1).
Historical records show that for AAA-rated municipal bonds, credit losses have been very close to zero, this was true even during the Great Depression.(2).
Historically, municipal bonds rated by a Nationally Recognized Statistical Rating Organization (NRSRO), and in particular general obligation bonds, have experienced very low default rates.(3).
Bonds with longer maturities are generally more susceptible to changes in interest rates than bonds with shorter maturities. Like all fixed income securities, the market prices of municipal bonds are susceptible to fluctuations in interest rates. If interest rates rise, market prices of existing bonds will typically decline. (3).
Many municipal bonds carry provisions that allow the issuer to call or redeem the bond prior to the actual maturity date. An issuer will typically call bonds when prevailing interest rates drop, allowing the entity to re-issue bonds at a lower borrowing cost. Be sure to ask your investment advisor about call provisions.
When investing in Municipal bonds you have two primary options: individual bonds or a mutual fund that invests in municipal bonds. As an investor, it’s important to remember that while investing in individual bonds and holding them until maturity or the call date enables you to effectively manage interest rate or market risk. You can depend on a fixed income payment. Bond mutual funds are just like stock mutual funds in that you put your money into a pool with other investors, and a professional invests that pool of money according to what he or she thinks the best opportunities are, in accordance with the fund’s stated investment goals.
BELOW IS A QUICK COMPARISON
*If you are subject to the Alternative Minimum Tax (AMT), you may have to include interest income from certain municipal securities in calculating your income tax.