What are municipal bonds?
municipal bonds ( or “ munis ” for light ) are debt securities issued by states, cities, counties and other governmental entities to fund daily obligations and to finance capital projects such as construction schools, highways or sewer systems. By purchasing municipal bonds, you are in effect lending money to the shackle issuer in central for a promise of regular matter to payments, normally semi-annually, and the return of the original investing, or “ principal. ” A municipal bond ’ s maturity date ( the go steady when the issuer of the bond repays the principal ) may be years in the future. short-run bonds mature in one to three years, while long-run bonds won ’ t mature for more than a ten .
broadly, the matter to on municipal bonds is excuse from federal income tax. The sake may besides be excuse from state and local taxes if you reside in the state of matter where the chemical bond is issued. Bond investors typically seek a steady stream of income payments and, compared to store investors, may be more risk-averse and more focused on preserving, preferably than increasing, wealth. Given the tax benefits, the interest rate for tax-exempt security municipal bonds is normally lower than on taxable fixed-income securities such as corporate bonds with like maturities, credit qualities and other items .
The two most common types of municipal bonds are the follow :
- General obligation bonds are issued by states, cities or counties and not secured by any assets. Instead, general obligation are backed by the “full faith and credit” of the issuer, which has the power to tax residents to pay bondholders.
- Revenue bonds are not backed by government’s taxing power but by revenues from a specific project or source, such as highway tolls or lease fees. Some revenue bonds are “non-recourse”, meaning that if the revenue stream dries up, the bondholders do not have a claim on the underlying revenue source.
In addition, municipal borrowers sometimes issue bonds on behalf of individual entities such as non-profit colleges or hospitals. These “ conduit ” borrowers typically agree to repay the issuer, who pays the interest and principal on the bonds. In cases where the conduit borrower fails to make a requital, the issuer normally is not required to pay the bondholders.
Where can investors find information about municipal bonds?
The Municipal Securities Rulemaking Board ’ s Electronic Municipal Market Access ( EMMA® ) website provides complimentary public access to municipal securities documents and data. Get access to :
information about Specific Municipal Securities
note that many issuers maintain websites or webpages specifically for investors in their municipal bonds. Some issuers hyperlink to those webpages from their home page on EMMA. Learn how to find issuer homepages on EMMA .
The SEC designated EMMA as the official repository for municipal securities disclosures in 2009. The SEC oversees the MSRB. The MSRB is a self-regulatory organization whose mission is to protect investors, state and local anesthetic governments and other municipal entities, and the populace concern by promoting a fair and efficient municipal securities market. Neither the SEC nor the MSRB review the disclosure documents prior to their poster on EMMA .
Learn more about how to use EMMA by visiting EMMA Help. besides, the MSRB welcomes questions about how to locate municipal alliance disclosures, including older ones that pre-date EMMA ’ s launching in 2009. Use their Contact Form. For EMMA updates, sign up for EMMA updates via MSRB communications and follow the MSRB on Twitter ( @ MSRBNews ) and LinkedIn .
What are some of the risks of investing in municipal bonds?
As with any investment, investing in municipal bonds entails risk. Investors in municipal bonds face a number of risks, specifically including :
Call risk. Call risk refers to the likely for an issuer to repay a bond before its adulthood date, something that an issuer may do if interest rates decline — much as a homeowner might refinance a mortgage loan to benefit from lower concern rates. Bond calls are less likely when interest rates are stable or moving higher. many municipal bonds are “ callable, ” so investors who want to hold a municipal alliance to maturity should research the adhesiveness ’ south call provisions before making a leverage.
Credit risk. This is the risk that the bond issuer may experience fiscal problems that make it difficult or impossible to pay interest and chief in full ( the bankruptcy to pay concern or chief is referred to as “ default ” ). Credit ratings are available for many bonds. Credit ratings seek to estimate the relative citation gamble of a bail as compared with early bonds, although a high rat does not reflect a prediction that the bond has no find of defaulting .
Interest rate risk. Bonds have a fixed expression value, known as the “ par ” value. If bonds are held to maturity, the investor will receive the face rate come back, plus matter to that may be set at a fix or floating rate. The bond ’ s grocery store price will move up as sake rates move down and it will decline as interest rates rise, so that the market value of the bond may be more or less than the par measure. U.S. interest rates have been abject for some meter. If they move higher, investors who hold a low fixed-rate municipal bond and try to sell it before it matures could lose money because of the lower commercialize value of the bail .
Inflation risk. Inflation is a general up bowel movement in prices. ostentation reduces purchasing world power, which is a risk for investors receiving a fixed rate of interest. It besides can lead to higher interest rates and, in turn, lower grocery store value for existing bonds .
Liquidity risk. This refers to the risk that investors won ’ metric ton find an active market for the municipal adhesiveness, potentially preventing them from buying or selling when they want and obtaining a sealed monetary value for the bond. many investors buy municipal bonds to hold them rather than to trade them, so the market for a particular alliance may not be particularly liquid and quoted prices for the same adhesiveness may differ .
In addition to the risks, what other factors should you consider when investing in municipal bonds?
Tax implications. Consider consulting a tax professional to discuss the bond ‘s tax implications, including the possibility that your shackle may be capable to the federal alternate minimal tax or eligible for state income tax benefits .
Broker compensation. Most brokers are compensated through a markup over the monetary value of the attachment to the tauten. This markup might be disclosed on your confirmation statement. If a deputation is charged, it will be reported on your confirmation statement. You should ask your broker about markups and commissions .
The background of the broker or adviser selling the bond. A securities salesperson must be by rights licensed, and, depending on the character of business the firm conducts, his or her firm must be registered with the MSRB and with FINRA, the SEC or a state securities regulator. You can check out an investment adviser on the SEC ‘s Investment Adviser Public Disclosure web site at www.adviserinfo.sec.gov and a agent on FINRA ’ s BrokerCheck web site at www.finra.org/brokercheck. To confirm MSRB registration, you can review the MSRB ’ south registered dealers list at hypertext transfer protocol : //www.msrb.org/Regulated-Entities/Registration-Status.aspx .
Read more: Debt Restructuring Definition
investor Bulletin : municipal Bonds ( March 2012 )
Investor Bulletin : focus on municipal Bonds ( September 2010 )
Investor Bulletin : New Rules for Improving municipal Disclosure
Using EMMA – Researching Municipal Securities and 529 Plans and ABLE Programs
SEC ’ south Office of Municipal Securities
Spotlight on Municipal Securities Markets
EMMA Help on the MSRB ’ s EMMA
The MSRB ‘s Education Center
The MSRB ‘s Glossary of Municipal Securities Terms
What is Mark-Up ?