How Safe Are Municipal Bonds?
Investors in the stock market often use bonds as a buffer against the volatility of the stock market and for the income most produce.
Bonds are usually considered a less risky investment than stocks.
The conventional wisdom is the stocks and bonds move in opposite directions. That is when the stock market is up; bonds are down and when the stock market is down; bonds are up.
While this is true in general, it is not true all the time and is not true of every bond issued.
If you are looking for security in bonds, you need to do your homework on each issue the same way you research stocks before you buy.
The exception to this rule are bonds and notes issued by the U.S. Treasury. These issues are considered the safest investment you can make because they are backed by the "full faith and credit" of the United States.
For this security, expect very low returns.
The two major types of bonds include municipal bonds and corporate bonds.
Municipal bonds fund projects for local governmental entities like states, counties, townships, cities, utility districts, and so on. Municipal bonds, often called munis, fund new roads, schools, sewers, and other projects; in some cases, fees collected from the project go to retire the bonds, in other cases tax money is used or a combination of both.
Although not as safe as the U.S. Treasury issues, munis have a good record of security. One of the key features of these bonds is that the income is free from federal income tax.
If you buy a muni, in the state where you live, the bond will likely be free from local, state, and federal income taxes.
Mutual funds that are state specific specialize in these types of municipal bonds.
This tax-free feature, combined with the relative security makes municipal bonds attractive to conservative investors. You buy munis from a broker either at new issue or existing bonds. They range in maturity from five to 30 years. Municipal bonds fall into one of two categories:
Thanks to the financial crisis of 2008-2010, many state and local governments will be is tough financial circumstances for many years. Soaring expenses and lower tax revenue have put governments in a financial bind.
If you are considering munis, you should double check the financial condition of the government entity backing the bonds (or have your broker do it). It is dangerous to assume that all municipal bonds are safe.
Although the default rate for municipal bonds has been historically low, that is no guarantee your bond is safe. States and communities with huge budget deficits, high unemployment and negative growth are vulnerable.
As with any investment, do your research before you buy and monitor the government entity behind the bonds.
Bonds are usually considered a less risky investment than stocks.
The conventional wisdom is the stocks and bonds move in opposite directions. That is when the stock market is up; bonds are down and when the stock market is down; bonds are up.
While this is true in general, it is not true all the time and is not true of every bond issued.
If you are looking for security in bonds, you need to do your homework on each issue the same way you research stocks before you buy.
The exception to this rule are bonds and notes issued by the U.S. Treasury. These issues are considered the safest investment you can make because they are backed by the "full faith and credit" of the United States.
For this security, expect very low returns.
The two major types of bonds include municipal bonds and corporate bonds.
Municipal bonds fund projects for local governmental entities like states, counties, townships, cities, utility districts, and so on. Municipal bonds, often called munis, fund new roads, schools, sewers, and other projects; in some cases, fees collected from the project go to retire the bonds, in other cases tax money is used or a combination of both.
Although not as safe as the U.S. Treasury issues, munis have a good record of security. One of the key features of these bonds is that the income is free from federal income tax.
If you buy a muni, in the state where you live, the bond will likely be free from local, state, and federal income taxes.
Mutual funds that are state specific specialize in these types of municipal bonds.
This tax-free feature, combined with the relative security makes municipal bonds attractive to conservative investors. You buy munis from a broker either at new issue or existing bonds. They range in maturity from five to 30 years. Municipal bonds fall into one of two categories:
- Revenue bonds: These bonds are tied to a project that generates fees or revenue of some type, a toll road, for example. This revenue is used to pay off the bonds. A risk for revenue bonds is the project will fail to generate enough revenue to cover the repayment of the bonds.
- General obligation bonds: These bonds are backed by the taxing authority of the governmental unit issuing them. They are considered less risky because taxes can be raised to cover bond repayment if necessary.
Thanks to the financial crisis of 2008-2010, many state and local governments will be is tough financial circumstances for many years. Soaring expenses and lower tax revenue have put governments in a financial bind.
If you are considering munis, you should double check the financial condition of the government entity backing the bonds (or have your broker do it). It is dangerous to assume that all municipal bonds are safe.
Although the default rate for municipal bonds has been historically low, that is no guarantee your bond is safe. States and communities with huge budget deficits, high unemployment and negative growth are vulnerable.
As with any investment, do your research before you buy and monitor the government entity behind the bonds.
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