What Exactly are Municipal Bonds?

2:36 PM Ritz 0 Comments

There are so many different ways to invest our money and municipal bonds are both a good investment and a conservative one. What exactly are municipal bonds? Municipal bonds are debt obligations issued by government entities. You are loaning money to the issuer in exchange for a set number of interest payments over a predetermined period when you buy a municipal bond. At the end of that period, the bond reaches its maturity date, and the full amount of your original investment comes back to you. If you are objective is to save your money, while generating a tax free stream, then municipal bonds are definitely worth considering. Tax exempt bonds get investors attention because the income they generate is for most investors exempt from federal and, in many cases, state and local income taxes.

The most basic strategy practiced by investors who specialize in municipal bonds is to purchase a bond with an attractive interest rate, or yield, and hold the bond until it matures. The next level of sophistication involves the creation of a municipal bond ladder. This is a series of bonds, each with a different interest rate and maturity date purchased. As each rung on the ladder matures, the principal reinvests into a new bond. Some investors who seek to generate both income and capital appreciation from the portfolio they build for themselves of municipal bonds, may choose an active portfolio management approach whereby bonds are bought and sold instead of held to maturity. By following this approach, as many savvy municipal bond owners and traders do, they are able to generate income from yields and capital gains from selling at a premium. Traders can follow municipal bonds in newspaper as well as on the Internet.