10 Things You Should Know About Investing In Municipal Bonds
79% of students with student loans understand they will pay back more than they borrowed, but 69% are concerned about repayment, and only 47% feel confident about their ability to pay back the loans.
Tax-exempt municipal bonds offer a tax advantage for funds not invested in an already tax-advantaged account, like an IRA.
Usually 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.
When investing in Individual Municipal bonds you have two primary options:
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General obligation bonds which are issued by states, cities or counties and not secured by any assets. Instead, general obligations are backed by the “full faith and credit” of the issuer, which has the power to tax residents to pay bondholders.
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Revenue bonds are not backed by the government's taxing power but by revenues from a specific project or source, such as highway tolls or lease fees. Some revenue bonds are “non-recourse,” meaning that if the revenue stream dries up, the bondholders do not have a claim on the underlying revenue source.
*When 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.
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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. This provides diversification, but monthly income fluctuates.
As the new coronavirus spread in mid-March and the U.S. economy began shutting down, investors cashed out of mutual funds and big money managers dumped billions of dollars worth of bonds, selling municipal bonds at rock-bottom prices. It was an opportunity to purchase Municipal bonds at these prices, however it is important to talk with a financial advisor before you jump in, especially now that many cities and states face financial difficulties and credit/liquidity risk should be evaluated when investing in Revenue bonds.
It is important to talk to your investment advisor about what best fits your needs. 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. Municipal Bonds LPL.pdf
(1). Bond_Market_Perspectives_06062017.pdf
(2).https://www.advisorperspectives.com/articles/2017/07/20/what-drives-municipal-bond-yields
(3).https://www.fidelity.com/fixed-income-bonds/individual-bonds/municipal-bonds
Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.