| Municipal bonds are the informal debt instruments | | | | advantage in investing in the corporate bonds |
| issued by county, state and city governments, to | | | | largely because of their tax-free status. |
| raise money for the community projects such as | | | | - Investors, who come under the high income tax |
| hospital, new school or a highway. The main | | | | brackets, are always better in investing in |
| feature of municipal bonds as a form of | | | | tax-free municipal bonds. |
| investment is that, the interest paid to the | | | | Safety of Municipal Bonds: |
| municipal bond owner is federal tax exempted. In | | | | In relation to the individual municipal bonds, very |
| addition, investors are exempted from state | | | | little information is available. This forces the |
| taxes in case they reside in the same state of | | | | investors to depend heavily on credit ratings that |
| issuance of municipal bonds. | | | | credit agencies assign. |
| Usually, there are two forms of investment in | | | | In order to ensure the safety of their |
| these. The first is termed as general obligation. | | | | investments, bondholders need to find out the |
| This depends on the issuer's ability to tax and | | | | following:- |
| issued for payment of projects such as sewer | | | | - The responsible authorities for servicing of |
| systems and schools. Majority of investors feel | | | | interest payments on bonds. |
| that general obligation bonds are much safer as | | | | - Check for the financial status of the issuer. |
| compared to their counterparts in the revenue | | | | Investors need to ask themselves, as to whether |
| section. However, this is a misconception. | | | | the place where they are investing is a promising |
| On the other hand, the local government | | | | community with a high net worth having growing |
| sanctioned entities or special state government | | | | citizen base, or a degenerating metropolis having |
| entities issue the revenue municipal bonds. | | | | low-income demographics. |
| With the revenue generated from business | | | | In the security analysis of 1942, Benjamin |
| backing the obligation, investors stand to gain | | | | Graham mentioned the below listed characteristics |
| from the interest. In case of water firms, | | | | of municipal bonds:- |
| bondholders get cash payment from the amount | | | | - Has a population of at least 10,000 or greater. |
| generated by the customers who pay their water | | | | - Diverse economy and, |
| bills. | | | | - It bears a good record of punctual payments on |
| Taxable Municipal Bonds V/s Tax - Free Municipal | | | | the previous obligations. |
| Bonds: | | | | As compared to the high-risk private bonds, |
| Investors having an average interest in bonds | | | | investment in government bonds is the best risk |
| may have a difficult time in deciding between | | | | free option. There is no wonder that conservative |
| tax-free municipal bonds and taxable corporate | | | | people still opt for them as a risk free form of |
| bonds. With the help of a formula known as | | | | investment. |
| taxable yield, investors can decide on the type of | | | | Investment in municipal bonds yields double |
| fixed income investment that may provide them | | | | benefit to the investor. The first one is that, the |
| with greatest after-tax return. | | | | investor gets to invest in public development |
| Below mentioned are the two major thumb rules | | | | projects and the second benefit is that, it comes |
| beneficial for amateur municipal bond investors:- | | | | with a small smart gain for the investor. |
| - Non-profitable organizations are always at an | | | | |