Municipal Bond Market

Municipal bonds are tied to states, their political areas and localities. These bonds can raise funds for the needs of the public like school systems, public structures, sewer and water systems, highways and more. In most cases, the interest earned from these bonds is free from federal taxation. They may also be exempt from state taxes, depending on the particular laws of the state. There are some clear benefits to municipal bonds. In addition to the tax-related advantages, these bonds are low-risk. Within the past half-century, under one percent of municipal bonds have been defaulted upon. Hundreds of billions of dollars of municipal bonds are owned by investors in the United States.

The issuers of municipal bond markets are local and state governments, and the buyers are both investment firms and individual investors. Bonds are interesting investment vehicles because the holder of the bond is in actuality loaning money to the issuer of the bond. This bond market usually receives levels of high activity during times of stock market lows because bonds are seen as low-risk investments.

Often local and state governments issue general obligation municipal bonds in order to raise money for things they need on a short term basis. The reason these are low-risk is because the government backs them. Bonds can have terms as short as six months or as long as 30 years. To pay back the holders of the bonds, sometimes the government uses tax earnings. As mentioned earlier, a bond may be callable. This means the government can terminate the bond and pay the holder before the specified bond due date.

In addition to general obligation municipal bonds, there are revenue bonds. These are not backed by profits from taxpayers. Revenue bonds are used by the government for things like building hospitals or toll roads. The money earned through the projects that the bonds paid for is the money used to pay interest and returns to the holders of revenue bonds.

Those who fall under high tax brackets find municipal bonds appealing because usually the interest earned is exempt from taxes. When investing money into tax-exempt bonds you may be able to reduce your tax bill. And, the issuers of municipal bonds pay lower interest rates than companies who issue corporate bonds due to the lower taxes.

If you would like to learn more about the municipal bond market, there is a publication from the Securities Industry and Financial Markets Associated called An Investor’s Guide to Municipal Bonds. You can get a copy of this from any municipal bond issuer. In general, the more you know about the investments you are making, the better off you will be when it comes to protecting and growing your money.

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