Investment in Municipal Bonds

By: Elton John
Usually, there are two forms of investmentin municipal bonds. The first is termed as general obligation. This depends on theissuer's ability to tax and issued for payment of projects such as sewersystems and schools. Majority of investors feel that general obligation bonds aremuch safer as compared to their counterparts in the revenue section. However,this is a misconception.

On the other hand, the localgovernment sanctioned entities or special state government entities issue therevenue municipal bonds.

With the revenue generated frombusiness backing the obligation, investors stand to gain from the interest. Incase of water firms, bondholders get cash payment from the amount generated by thecustomers who pay their water bills.

Taxable Municipal Bonds V/s Tax – Free Municipal Bonds:

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Investors having an averageinterest in bonds may have a difficult time in deciding between tax-freemunicipal bonds and taxable corporate bonds. With the help of a formula knownas taxable yield, investors can decide on the type of fixed income investmentthat may provide them with greatest after-tax return.

Below mentioned are the two major thumb rules beneficial for amateur municipalbond investors:-

  • Non-profitable organizations are always at an advantage in investing in the corporate bonds largely because of their tax-free status.
  • Investors, who come under the high income tax brackets, are always better in investing in tax-free municipal bonds.

Safety of Municipal Bonds:

In relation to the individual municipal bonds, very little information isavailable. This forces the investors to depend heavily on credit ratings thatcredit agencies assign.

In order to ensure the safety oftheir investments, bondholders need to find out the following:-

  • The responsible authorities for servicing of interest payments on bonds.
  • Check for the financial status of the issuer.

Investors need to ask themselves,as to whether the place where they are investing is a promising community witha high net worth having growing citizen base, or a degenerating metropolishaving low-income demographics.

In the security analysis of 1942,Benjamin Graham mentioned the below listed characteristics of municipal bonds:-

  • Has a population of at least 10,000 or greater.
  • Diverse economy and,
  • It bears a good record of punctual payments on the previous obligations.

As compared to the high-riskprivate bonds, investment in government bonds is the best risk free option. Thereis no wonder that conservative people still opt for municipal bonds as a riskfree form of investment.

Investment in municipal bondsyields double benefit to the investor. The first one is that, the investor getsto invest in public development projects and the second benefit is thatFree Web Content, itcomes with a small smart gain for the investor.

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