Municipal Bond Basics

Municipal bonds are popular debt security investment tools issued by the government. While there are other forms of investment issued through the same source, “munis” offer some specific perks that you may enjoy. To find out if you will, let’s explore the basics of municipal bonds.

What Are Municipal Bonds?

As mentioned previously, municipal bonds are debt obligations that are issued via government entities. The idea of this type of bond is to loan money to the issuer in exchange for the receipt of a set number of interest payments that will be made over a predetermined period of time. You will also be given a maturity date, which will end the length of the loan. When this date is reached, your original investment will be returned to you with a final interest payment.

How Are Municipal Bonds Offered?

There are two ways that municipal bonds are offered to investors; via taxable and tax-exempt formats. If you choose the taxable route, you will have to include your interest income from you bond when filing your taxes. However, if you take the tax-exempt route, the income you generate usually escapes federal taxes – and sometimes even state and local taxes as well.

There are also two varieties of municipal bonds to consider when you’re thinking about buying. The first is the revenue bond, which is supported by specific projects, such as toll bridges and highways. The other is the general obligation bond, which is backed by the credit of the issuing jurisdiction, rather than the revenue from a specific project.

Are There Any Risks Involved?

In general, the risk involved in municipal bonds is low; however, they are not completely risk-free. For instance, there is a risk that the issuer won’t be able to meet the financial obligation once the maturity date is reached. Also, there is a risk that the interest rate you thought was fixed might change if rates in the marketplace rise.

Purchasing municipal bonds is just one way to invest your money. So if you think buying a bond is a good route to take, it’s good to explore all types of bonds before making your final decision.