Municipal bonds (muni bonds) are one of the safest investment options around. They’re issued by the city, county or state to pay for specific projects, such as hospitals and schools. It’s a way for the city, county or state to borrow money. The city takes your money and writes you an IOU in the form of a muni bond.
There are two main types of municipal bonds. General obligation bonds are used to pay for things like roads and sewer systems. Revenue muni bonds are used to invest in businesses, such as utility companies. The interest comes from the revenue of the business. This makes revenue muni bonds inherently slightly more risky.
The main benefit of investing in muni bonds is that they are usually exempt from taxes. This makes them popular with investors in the higher tax brackets.
If you’re thinking of investing in bonds, you’ll need to decide if you want to buy new bonds when they’re first issued, or previously issued bonds. There’s a large secondary market for the latter. In some cases, you can buy muni bonds through your bank. Alternatively, there are many dealers and brokerage firms that can sell you muni bonds. Check that they’re licensed before you agree to invest. Unlike with stocks, municipal bond brokerages can add a markup on the bonds they sell. Be sure to take that into account when deciding on an investment. To check rates, go to The Motley Fool (www.fool.com [1]).
Municipal bonds are a good long-term investment for people who pay high rates of tax. If you’re in a lower tax bracket, or you need a short-term investment, muni bonds may not be very good value for you.