Do you have money saved up and are looking for a good way to invest it? If so, Bill Schantz of Mid Atlantic Financial, LLC recommends considering investing in municipal bonds. Municipal bonds can be a great investment option, but there are some things you need to know before you dive in. So if you’re interested in learning more, keep reading!
All About Investing in Municipal Bonds
Municipal bonds are debt securities used to finance public projects like roads, schools, and bridges. These are issued by local and state governments. Investors in municipal bonds receive interest payments from the issuer, typically on a semi-annual basis. The interest income received from municipal bonds is generally exempt from federal income tax, says Bill Schantz, and may also be exempt from local and state taxes for investors from the issuance state.
Municipal bonds are an attractive investment for many reasons. The tax-exempt status of the interest income can result in a higher after-tax return than other types of investments. Additionally, munis are often considered to be relatively low risk, as the issuers have the ability to raise taxes or fees if necessary to meet their debt obligations.
Investors in municipal bonds should be aware of a few potential risks. First, the issuer may default on its debt obligations, which would result in the loss of principal and interest payments. Additionally, changes in tax laws could adversely affect the value of tax-exempt investments. Finally, muni bonds are subject to market risk, just like any other type of investment.
Despite these risks, municipal bonds can be a valuable addition to any investor’s portfolio. For investors looking for income with favorable tax treatment, munis can be an attractive option.
List of Pros and Cons of Investing in Municipal Bonds
– Diversification: When you invest in municipal bonds, you are diversifying your portfolio and spreading out your risk. This is because municipal bonds are not correlated with stocks and other investments.
– Tax exemption: Municipal bonds are exempt from federal taxes and may also be exempt from state and local taxes if the bond is issued in your state of residence. This makes them an attractive investment for people in high tax brackets.
– Steady income: Municipal bonds provide a steady stream of income, which can be helpful if you are retired or close to retirement. The interest payments on municipal bonds are usually paid semi-annually.
– Safety: Municipal bonds are considered to be one of the safest investments. This is because they are backed by the full faith and credit of the issuing government, which means that the government is obligated to pay back the bonds.
– Illiquidity: Municipal bonds are not as liquid as other investments, such as stocks and mutual funds. This means that it may be difficult to sell your bonds if you need the money in a hurry.
– Interest rate risk: When interest rates rise, the value of existing bonds falls. This is because investors can get a higher return on their investment by investing in new bonds that have a higher interest rate.
– Call risk: Some municipal bonds are “callable,” which means that the issuer has the right to redeem the bonds before they mature. If this happens, you will not get the full interest payments that you were expecting.
– Reinvestment risk: When you receive your interest payments, you may have to reinvest them in new bonds with a lower interest rate, says Bill Schantz. This can reduce the overall return on your investment.
The Concluding Thoughts
Municipal bonds are a type of debt security that is issued by states, cities, counties, and other governmental entities in order to finance public works projects such as schools, hospitals, roads, and bridges.
Municipal bonds have been around for centuries, according to Bill Schantz, but they have become increasingly popular in recent years as interest rates have declined. Investors who buy municipal bonds receive regular interest payments from the issuer, and the principal amount of the bond is repaid at maturity. Municipal bonds offer tax-free income to investors, making them an attractive investment for those in high tax brackets. There are a variety of different types of municipal bonds available, so investors should do their homework before investing.