Municipal Bonds: Important Information for Investors

Municipal Bonds (nicknamed munis) are bonds issued by cities, states, counties and various districts to raise money to finance operations or pay for projects including: Building highways, housing, library, airport, new schools or other community projects. Municipal Bonds have a Maturity Date, when the bonds will be redeemed or purchased on a specific date and amount. The authority to issue Municipal Bonds, are authorized by voters or legislatures. These bonds are sold to investors, which include financial institutions, corporations, and individuals. A brokerage firm or financial institution will be chosen to underwrite or sell Municipal Bonds for a municipality. Interest paid on Municipal Bonds are set at a fixed rate, and paid every six months. Anyone that purchases a Municipal Bond, within the same state where they live, would be exempt from paying any Income Tax, on the interest collected. Also, if the investor lives in a State, were there is no State Income Tax, then the same tax advantage would apply. Otherwise, a portion of the interest earned would be taxable. When a Municipal Bond is sold at gain, either before or upon Maturity Date, the investor has to pay a capital gain tax. In 2004, $383 billion of Municipal Bonds where sold, compared to $359 billion sold in 2003.

Municipal Bonds are either General Obligation Bonds or Revenue Bonds. General Obligation Bonds are secured to pay the interest, by the ability to collect tax revenue. Revenue Bonds are secured to pay the interest by income collected, from sources within the community, which include utilities, water, tolls or other sources.

Definitions for Municipal Bonds

Municipal bonds are issued at Par Value, which means in units $1,000 or 100 equals Par Value. When a Municipal Bond reaches the Maturity Date that will tell the bond – holder to expect payment of Par Value, from the issuer. During the time the Municipal Bond is held by the bond – holder, value of the bond will often trade below the Par Value, which is a Discount to Par Value. When a bond is trading above Par Value that is a Premium to Par Value. The Coupon Rate of a bond refers to the fixed interest rate amount, that will paid on that bond, every six months, until Maturity Date. Primary Markets were new Municipal Bonds are sold, by brokerage or financial institutions. Secondary Markets were most Municipal Bonds are sold, after their initial offering. Municipal Bonds are sometimes sold with a callable or redeemable attachment. This means that the issuer of the bond has the option to pay the investor, the Callable Price, which is usually the face value of the bond with accrued interest, prior to Maturity Date. This happens when interest rates are falling, and the issuer can save money by paying the face value of the bond, and saving high interest payments. Closing Price of a Municipal Bond value is determined, at the end of a business day. This price is listed in business periodicals, including the Wall Street Journal and Barrons publication.

Municipal Bond Rating

Municipal Bonds are rated by risk or quality evaluation. The two most popular rating services are Moody’s Investor and Standard & Poor’s Corporation. Their evaluation, and research helps investors determine the quality or risk associated to Municipal Bond investing. When bonds are given a low rating, the probability is high, that the bond issuer will default on paying any further interest or possible declare bankruptcy. A high rating is attributed to the financially strength of the issuer, to pay interest on time, and pay the face value of the bond, upon Maturity Date.

Investing in Municipal Bonds can be done through an Open or Closed End Fund. These funds invest in a variety of Municipal Bonds, with different Maturity Dates, yields and ratings. The investor usually receives monthly interest and any capital gain distribution. These funds have professional managers that are knowledgeable, regarding Municipal Bond investing.

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