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Sound Advice: March 5, 2025

What do I need to know about municipal bonds? 

Municipal bonds, or "munis," are debt securities issued by state and local governments to finance public projects and day-to-day operations.  Here are key points to understand about municipal bonds:

  1. Purpose: They fund capital projects such as schools, highways, and sewer systems.
  2. Types:
    • General Obligation (GO) bonds: Backed by the issuer's taxing power.
    • Revenue bonds: Secured by income from specific projects, such as toll roads.
  3. Interest payments: Bondholders receive regular interest payments, usually semiannually.
  4. Tax benefits: Interest is often exempt from federal income tax and sometimes from state and local taxes.
  5. Maturity: Can be short-term (1-3 years) or long-term (over a decade).
  6. Risk: Generally lower default risk compared to corporate bonds, but revenue bonds may be more vulnerable to economic changes.
  7. Market size: As of Q3 2024, the municipal bond market was valued at $4.2 trillion.
  8. Investors: Typically attract those seeking steady income and tax benefits, especially in higher tax brackets.
  9. Interest rates: Usually lower than taxable securities due to tax benefits.
  10. Call provisions: Many municipal bonds can be redeemed by the issuer before maturity.

Understanding these basics can help investors make informed decisions about including municipal bonds in their investment portfolios.

When choosing a municipal bond, consider the following key factors:

  1. Tax implications: Municipal bonds often offer tax-exempt interest at the federal level and potentially at the state level. Your tax bracket significantly influences the attractiveness of municipal bonds compared to other investments.
  2. Account type: Municipal bonds are generally more suitable for taxable accounts rather than tax-deferred accounts like IRAs or 401(k)s.
  3. Yield and maturity: Compare the yields of municipal bonds to corporate bonds of similar maturities, considering the tax-equivalent yield. The time to maturity affects both the yield and the bond's sensitivity to interest rate changes.
  4. Credit quality: Assess the issuer's creditworthiness and the bond's credit rating. Higher-rated bonds generally offer lower yields but are considered safer investments.
  5. Type of municipal bond:
    • General Obligation (GO) bonds: Backed by the issuer's taxing power
    • Revenue bonds: Secured by income from specific projects
    • Tax-increment financing (TIF) bonds: Financed by expected increases in property tax revenues
  6. Purpose and revenue source: Understand the specific project or purpose the bond is funding, especially for revenue bonds.
  7. State of issuance: Consider bonds from your home state for potential additional tax benefits, but also evaluate out-of-state options, especially if you live in a low or no income tax state.
  8. Market conditions: Be aware of current interest rates and economic factors that may affect bond prices in the secondary market.
  9. Minimum investment: Most municipal bonds have a minimum denomination of $5,000, but some may require larger investments.
  10. Insurance: For insured municipal bonds, evaluate the credit ratings of both the insurer and the underlying issuer.
  11. Liquidity: Consider how easily you can sell the bond if needed before maturity.

By carefully evaluating these factors, you can make a more informed decision when selecting municipal bonds that align with your investment goals and risk tolerance.

N. Russell Wayne

Weston, CT  06883

203-895-8877

www.soundasset.blogspot.com

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