Municipal Bonds: 5 Ways to Get the Best Deal

Monday, 31 Jan 2011 09:46 AM

Share:
  Comment  |
   Contact Us  |
  Print  
|  A   A  
  Copy Shortlink
Municipal bonds are debt obligations issued by government departments, states, or cities to raise money for undertaking public development works such as the building of schools, highways, or hospitals.
 
Municipal bonds are available in both taxable and tax-exempt formats. However, the most popular municipal bonds are those exempt from federal taxes and, in many cases, state and local income tax.

When buying municipal bonds, one needs to consider the effective yield from these tax-free bonds. Yield from municipal bonds is usually less than the yield one can get from taxable bonds of similar maturities. However, as one doe not pay tax on income from municipal bonds, one’s actual net yield can be higher than the taxable yield received from the corresponding corporate bonds.
 
Check Issuer’s Financial Condition and Rating:
When buying municipal bonds, one has to figure out if the issuer is likely to be able to meet its financial obligations, make scheduled interest payments, and repay the principal upon maturity. To do this, check the financial condition of the issuers through their official statements or offering circulars.
 
One can also buy bonds based on the ratings given to them by agencies such as Moody's Investors Service and Standard & Poor's. The agencies analyze the issuer's creditworthiness and their ability to meet the debt obligations. Thereafter, they give the issuers ratings ranging from "Aaa" or "AAA" for the most creditworthy issuers to "Ca," "C," "D," "DDD," "DD" or "D" for those in default.
 
Holding period:
Another basic strategy for investing in municipal bonds is to purchase a bond with an attractive interest rate, or yield, and hold it until it matures.
 
Bond Ladders:
One can also invest in municipal bonds by creating a bond ladder. This simply means buying a series of bonds, each with a different interest rate and maturity date. As each bond matures, the principal can be reinvested into a new bond. This simple device minimizes the interest risk associated with bond investing and manages the cash flow from the investment.
 
Local Bonds:
Municipal bonds can also be bought locally. Since bonds issued by one state are free of local as well as federal taxes, this makes single-state municipal bond funds especially attractive for high earners in high-tax states. Nevertheless, one should always consider the particular state’s financial situation before buying these single-state municipal bonds.
 
Zero Coupon Bonds:
Buying Zero Coupon Bonds is another option. However, you will have to exercise a bit of caution in this case, as zero coupon bonds have no periodic interest payments. The zero coupon bonds provide one lump sum payment at the time of maturity, which equals the principal invested and the interest earned, compounded semi-annually. The advantage of these bonds is that zero coupon bonds are sold at a substantial discount from their face amount. Like regular bonds, zero coupon bonds are great for targeting a possible financial need that is likely to arise in the future — for example, a child’s college education or retirement.

© Newsmax. All rights reserved.

Share:
  Comment  |
   Contact Us  |
  Print  
  Copy Shortlink

PLEASE NOTE: All information presented on Newsmax.com is for informational purposes only. It is not specific medical advice for any individual. All answers to reader questions are provided for informational purposes only. All information presented on our websites should not be construed as medical consultation or instruction. You should take no action solely on the basis of this publication’s contents. Readers are advised to consult a health professional about any issue regarding their health and well-being. While the information found on our websites is believed to be sensible and accurate based on the author’s best judgment, readers who fail to seek counsel from appropriate health professionals assume risk of any potential ill effects. The opinions expressed in Newsmaxhealth.com and Newsmax.com do not necessarily reflect those of Newsmax Media. Please note that this advice is generic and not specific to any individual. You should consult with your doctor before undertaking any medical or nutritional course of action.

Keeping you up to speed on Lifestyle, health, and money-saving tips
 
 
Get me on Fast Features
Keeping you up to speed on Lifestyle, health, and money-saving tips
 
Email:
Country
Zip Code:
Privacy: We never share your email.
 
Follow Newsmax
Top Stories

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

 
NEWSMAX.COM
America's News Page
©  Newsmax Media, Inc.
All Rights Reserved