Written by What Are Municipal Bonds?
- Definition: Municipal bonds are debt securities issued by local or state governments to finance public projects such as schools, hospitals, or infrastructure.
- Tax Benefits: The interest income from municipal bonds is often exempt from federal taxes and, in some cases, state and local taxes, making them attractive for investors in higher tax brackets.
- Types of Municipal Bonds: There are two main types of municipal bonds: general obligation bonds (backed by the taxing power of the issuer) and revenue bonds (backed by the revenue generated from the project being financed).
Benefits of Municipal Bonds
- Tax Exemption: The tax-exempt nature of municipal bond interest can make them highly attractive to high-income earners.
- Low Risk: Municipal bonds are considered relatively low-risk investments, especially those issued by financially stable states or municipalities.
- Steady Income: Municipal bonds provide regular interest payments, making them a reliable source of income for investors.
Risks of Investing in Municipal Bonds
- Credit Risk: There is a risk that the issuing municipality could default on its bonds, though this is generally rare for bonds issued by creditworthy entities.
- Interest Rate Risk: Like all bonds, municipal bonds are affected by interest rate changes. Rising interest rates can cause bond prices to fall.
- Liquidity Risk: Municipal bonds may be harder to sell than other types of bonds, particularly those from smaller or less stable municipalities.
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