20 Investments: Municipal Bonds
AAA
  1. 20 Investments: Introduction
  2. 20 Investments: American Depository Receipt (ADR)
  3. 20 Investments: Annuity
  4. 20 Investments: Closed-End Investment Fund
  5. 20 Investments: Collectibles
  6. 20 Investments: Common Stock
  7. 20 Investments: Convertible Security
  8. 20 Investments: Corporate Bond
  9. 20 Investments: Futures Contract
  10. 20 Investments: Life Insurance
  11. 20 Investments: The Money Market
  12. 20 Investments: Mortgage-Backed Securities
  13. 20 Investments: Municipal Bonds
  14. 20 Investments: Mutual Funds
  15. 20 Investments: Options (Stocks)
  16. 20 Investments: Preferred Stock
  17. 20 Investments: Real Estate & Property
  18. 20 Investments: Real Estate Investment Trusts (REITs)
  19. 20 Investments: Treasuries
  20. 20 Investments: Unit Investment Trusts (UITs)
  21. 20 Investments: Zero-Coupon Securities
  22. 20 Investments: Conclusion
20 Investments: Municipal Bonds

20 Investments: Municipal Bonds

What Is It?
Municipal bonds, or "munis" for short, are debt securities issued by a state, municipality or county to finance its capital expenditures. Such expenditures might include the construction of highways, bridges or schools. Munis are bought for their favorable tax implications and are popular with people in high income tax brackets.

The major advantage to municipal bonds is that many of them are exempt from federal taxes and most are exempt from state and local taxes too, especially if you live in the state that issues the municipal bond. For example, Washington residents can get triple tax savings by buying WA municipal bonds because they pay no federal, state or local income tax on them. For this reason, munis are very popular with wealthy investors because they avoid having to claim the income for tax purposes. (To learn more about munis, see The Basics Of Municipal Bonds and Weighing The Tax Benefits Of Municipal Securities.)

There are two types of municipal debt:

1. Public Purpose - these are bonds used for government projects and are always tax exempt.

2. Private Purpose - slightly different in the sense that they are only tax exempt if it clearly says so, otherwise you are subject to the provisions placed on the bond. (This can vary widely from bond to bond.) These types of munis are called private purpose because they usually fund a project that will benefit both government and a private entity.

Objectives and Risks
For the most part, investors should buy munis for income. While capital appreciation is possible in a falling interest rate environment, this isn't considered a primary objective of munis. When looking at muni quotes, remember that their yield is usually quite low because the tax benefits are usually priced into the bond already.

There are no substantial risks associated with buying a muni - just make sure to research the municipality from which you are purchasing it. For example, a New York muni would probably be a little more creditworthy than one from Puddle Jump, Wyoming.

How To Buy or Sell It

Municipal bonds can be purchased from almost any full-service broker and most discount brokers. Some municipalities also allow you to purchase the bonds directly through them. Minimum investment in a muni can start in the thousands of dollars.

A popular new way to invest in munis is through municipal bond funds, which pool together munis from various states and cities, allowing you to have a well-diversified portfolio while getting all the benefits that you would get purchasing the muni yourself. (For a general introduction to the world of bonds, see our Bond Basics Tutorial.)



Strengths
  • Income from municipal bonds is tax exempt, but capital gains are not.
  • Munis are considered to be very low-risk investments.

  • Weaknesses
  • Municipal bonds in smaller municipalities can sometimes be difficult to sell quickly.

  • Three Main Uses
  • Tax-Exempt Savings
  • Provides Income
  • Protects Principal
  • 20 Investments: Mutual Funds

    1. 20 Investments: Introduction
    2. 20 Investments: American Depository Receipt (ADR)
    3. 20 Investments: Annuity
    4. 20 Investments: Closed-End Investment Fund
    5. 20 Investments: Collectibles
    6. 20 Investments: Common Stock
    7. 20 Investments: Convertible Security
    8. 20 Investments: Corporate Bond
    9. 20 Investments: Futures Contract
    10. 20 Investments: Life Insurance
    11. 20 Investments: The Money Market
    12. 20 Investments: Mortgage-Backed Securities
    13. 20 Investments: Municipal Bonds
    14. 20 Investments: Mutual Funds
    15. 20 Investments: Options (Stocks)
    16. 20 Investments: Preferred Stock
    17. 20 Investments: Real Estate & Property
    18. 20 Investments: Real Estate Investment Trusts (REITs)
    19. 20 Investments: Treasuries
    20. 20 Investments: Unit Investment Trusts (UITs)
    21. 20 Investments: Zero-Coupon Securities
    22. 20 Investments: Conclusion
    20 Investments: Municipal Bonds
    RELATED TERMS
    1. Variable Annuitization

      An annuity option in which the amount of income payments received ...
    2. Welfare Capitalism

      Definition of welfare capitalism.
    3. Business Broker

      A professional who specializes in the purchase and sale of companies. ...
    4. Return On Equity - ROE

      The amount of net income returned as a percentage of shareholders ...
    5. Forbearance

      A temporary postponement of mortgage payments.
    6. Warranty of Title

      A guarantee by a seller to a buyer that the seller has the right ...
    1. Do real estate agents need a degree?

      Earning a degree is required by many real estate brokerages, as well as by some state's real estate boards. Getting a degree ...
    2. Where can you get real estate advice?

      Learn where to find unbiased real estate advice on the Web, and get a brief sampling of the types of issues to take into ...
    3. What do real estate attorneys do?

      Understand the role of a real estate attorney to help you decide if you would benefit from the expertise of this type of ...
    4. How are real estate taxes calculated?

      Find out how real estate taxes are calculated; failure to pay these taxes that can be a substantial annual expense can lead ...
    comments powered by Disqus
    Related Tutorials
    1. Investing For Safety and Income Tutorial
      Bonds & Fixed Income

      Investing For Safety and Income Tutorial

    2. American Depositary Receipt Basics
      Economics

      American Depositary Receipt Basics

    3. Certificates Of Deposit
      Bonds & Fixed Income

      Certificates Of Deposit

    4. Binary Options Tutorial
      Options & Futures

      Binary Options Tutorial

    5. Top ETFs And What They Track: A Tutorial
      Mutual Funds & ETFs

      Top ETFs And What They Track: A Tutorial

    Trading Center