What is a Municipal bond
Municipal bond-a debt security issued by a state, municipality or County to Finance capital investments, including construction of roads, bridges or schools. Municipal bonds are not subject to Federal taxes and most state and local taxes, which makes them particularly attractive for people in high income tax brackets.
Breaking down municipal Bonds
Municipal bond-a debt obligation issued by non-profit organizations, private sector corporations, or other public entity using a loan for public projects, such as construction of schools, hospitals and roads.
The types of municipal Bonds
Municipal bonds are determined on the basis of the source of payment of interest and principal. Bonds can be structured in different ways, offering different benefits, risks, and tax procedures. Proceeds from the issuance of municipal bonds may be taxed. For example, a municipality may issue equipment for Federal tax benefits, resulting in income subject to Federal taxes.
General obligation bonds (go) issued by state bodies and not relying on the income of a specific project such as a toll road. Some bonds backed by a dedicated property tax; others are paid from General funds.
Income bond provides the principal and interest payments at the expense of the Issuer, or from sales, fuel, accommodation and other taxes. When the municipality is the mediator of the bond Issuer, the third party covers the interest and principal payments.
Risks Of Municipal Bonds
The risk of default is low for municipal bonds compared to corporate bonds. However, revenue bonds are more vulnerable to changes in consumer tastes or a General economic downturn, than go bonds. For example, a means of water supply, sewage treatment or other basic services, has more reliable income than Park leased housing area.
As securities with fixed income, the market price of municipal bonds fluctuates with changes in interest rates: if interest rates rise, bond prices decrease and when interest rates fall, bond prices rise. In addition, bonds with longer maturities are more sensitive to changes in interest rates than bonds with shorter maturity, causing even more changes in the income of the investor in municipal bonds. In addition, most municipal bonds is illiquid; an investor requiring immediate cash needs to sell, and not other securities.
Many municipal bonds carry provisions that allow the Issuer to redeem bonds before maturity. The Issuer typically calls bonds when interest rates fall and issue municipal bonds at a lower interest rate. When the bond is called, investors will lose the income from interest payments and face to reinvest in bonds with lower yields.