subject: Investing In Municipal Bonds 101 [print this page] Munis or municipal bonds are not the darlings of the world of investing. Who would talk about munis when you can discuss fancier investments such as options, futures, commodities and even stocks? But, thats where a lot of people miss the boat. Municipal bond investing doesn't promise the stellar returns that some of the other investments may yield but munis are also a lot less riskier. A lot of folks saw their investment accounts get wiped out in the financial crisis of 2008-09 and finally thought about buying municipal bonds.
Now, that we have your attention, lets take a look at munis. These bonds are basically debt obligations issued by a local government entity like a municipality where the money collected is used to finance public works projects. The bond holder or the person who buys the bond gets payments on the fixed interest rate at fixed time intervales (e.g. 6 months, 12 months or more) till the bond matures. The date of maturity is when the bond issuer (the borrower) will return the principal back to you (the lender in this case). In a nutshell, you get fixed interest payments from a government back entity for an extended period of time. You must've noticed that the only risk involved here is the risk of default by the local government entity. The chances of that are fairly low so the returns that you get in the process are understandably conservative.
Being the smart investor that you are, you must be thinking are all municipal bonds the same? The answer is no. Now, you must be thinking that if they aren't the same which ones give you the best return? Good question. Here are a few pointers for choosing amongst the rest of the bonds:
Credit quality: There are different rating agencies for bonds and various other financial instruments. Standard & Poors is one of the more popular agencies. An important point to remember is that don't blindly go for the bonds with the highest ratings. These are the ones with the least risk involved but that's also why they give the lowest return. Do some due diligence (fancy phrase for research) and take a look at different bonds before making your decision.
Bond evaluation: Its also important to have the securities that you are considering be evaluated by TRACE. This server is offered online and its purpose is to give reliable pricing information and price trends. In simpler terms, they will help you determine whether the bonds are a good buy right now or not. Also, if you want to figure out the best point to enter the investment or exit it, TRACE will help you.
by: Mike Singh
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