A Safer Way to Invest – Municipal Bonds

Investing in the stock market or in corporate bonds may be a good way to earn some extra money. But often, there is a certain amount of risk that is attached to these types of investments. Those who are looking to invest money, but without much risk, municipal bonds may be their best option.

First, what are bonds? To an issuer of a bond, the bond is a type of debt. But to someone who buys a bond, the bond is a type of loan. Municipal bonds are issued by the government to help make improvements in communities – by building schools, parks, highways, etc. Because these bonds are backed by the government, there is less risk associated with them.

It’s a good idea to research the risk involved with purchasing a bond – even a municipal bond. Your bank can help you if they have a bond research department or you can obtain the information on the Internet or from brokerage firms. You can also visit the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) at http://emma.msrb.org to find out how safe it is to purchase a bond from a particular municipality.

Many federal bonds are tax exempt – unlike corporate bonds that are taxable. This is one reason that municipal bonds are so popular. You can safely invest your money without having to be taxed. Municipal bonds are also very marketable in today’s economy, which means they are easier to buy and sell.

There are two main types of tax-exempt bonds: general obligation bonds and revenue bonds. General obligation bonds are secured or backed by projects that are paid for by taxes. Revenue bonds are secured or backed by projects that generate revenue – such as tolls or rents from new facilities like hospitals or government housing.

While the majority of municipal bonds are not taxed by federal and state governments, there are some types of municipal bonds that are. If the federal government does not rule that the municipal project is for the greater public good, it will not back the municipal bond, and therefore the bond becomes taxable. New sports facilities are a good example of a government taxed bond.

Like corporate bonds, municipal bonds have a value that can fluctuate – even with a fixed interest rate. If you plan to hold your municipal bond until it matures, and it has a fixed interest rate, you don’t have to worry about fluctuating interest rates. But if you plan to sell and buy bonds on the bond market, then you should be aware of changing interest rates and bond values.

If interest rates go up, the bonds previously purchased at lower interest rates are actually worth less. That’s because new bonds will be issued with higher rates. That means you would have to sell the bonds with lower interest rates at a discounted price.

The opposite is true if interest rates go down. You’ll be able to sell your bonds with higher interest rates attached to them for more money. Therefore the value goes up for those bonds when interest rates fall.

But how do you buy and sell bonds? Bonds are typically traded in an over-the-counter (OTC) market by dealers and brokers. Today, most corporate bonds are traded electronically; and there is no central location, like in the New York Stock Exchange, where bond most trades happen. Though some bonds are traded on the stock market, it’s not as common as the OTC market.