Issued by local governments or their corresponding agencies, municipal bonds are debt obligations for public projects including the construction of schools, parks and more. Generally they are federally tax exempt and have a lower level risk of default when compared to other bond types. Still make sure you read up on the risks associated with such bonds before you go ahead and make a purchase.
Municipal bonds general come in two types- general obligation bonds and revenue bonds. How do these differ? The issuers of revenue bonds are typically non-profit organizations and private sector corporations while general obligation bonds are issued by governmental entities. Depending on the infrastructure needs of the municipality, these types of bonds are issued as a sort of financial security. So why would anyone want to purchase a municipal bond?
These sorts of bonds are a great investment for individuals looking to investment in something that provides a tax advantaged income. But they may not be for everyone. Investing in municipal bonds makes most sense for those in the high 25 percent federal tax bracket or more. These bonds tend to be very expensive whether individual or mutual even when purchased from discount brokers. Furthermore, doing the research to see which bonds have the most success is necessary when shopping around. You never know when a banking meltdown or some other sort of financial catastrophe could occur and often in some types of municipal bonds, you may not get your money back.
7Going back, the purchase of these bonds is like an investment in public infrastructures such as highways, water managements, schools and so much more. So when you purchase one of the various types of municipal bonds it is like you are lending money to the local government or state and in turn are given a promise to be repaid back the interest and principal once it reaches maturity. But make sure you read between the lines because some forms of these bonds can be taxable when it comes to certain issues such as public facilities that are not necessarily supported by the federal government. So while municipal bonds, also known as Munis, are a great investment for those who can afford them and are looking for a way to gain return while also investing in local and public infrastructures, taking the time to research which one is best for you is imperative.