Skip to main content

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

Comments

Popular posts from this blog

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...