Investing in Municipal Bonds

Financial Planner Owings Mills MD

Investing in Municipal Bonds

A financial planner Owings Mills MD residents trust can help lead you in the right direction when considering investments in municipal bonds. First, what is a municipal bond? A municipal bond is a debt obligation offered by a state government or municipality that uses the loans to provide funding for public projects, such as the construction of schools, hospitals, and highways. Most of the time, your municipal securities are exempt from federal income taxes and often from state or local income taxes as well. Consult a financial planner Owings Mills MD turns to for answers about how taxes may apply in your case.

Risk Considerations

Municipal bonds generally have a low default risk, as a respected financial planner Owings Mills MD consults with on a regular basis may explain. There are rarely defaults in the municipal bond market; only 80 municipal bonds have defaulted between 1970 and 2014. Municipal bonds have certainly shown strength over time, but they are not completely risk-free.

A financial planner in Owings Mills MD will likely tell you to consider the risks in investing in municipal bonds, such as call risks and liquidity risks. A call risk occurs when an issuer can redeem the bond before the maturity date. This means the investor is losing out on more potential income, which is not desirable for the bond holder.

Another risk associated with municipal bonds is their lack of liquidity. A financial planner Owings Mills MD clients respect may advise caution if liquidity is a concern for you.

When it comes to interest rate risks, municipal bonds carry an additional risk. The interest rate is usually paid at a fixed rate for municipal bonds, and this will be true throughout the lifetime of the bond. This means that even if interest rates rise for the rest of the market, the municipal bond you own will pay a lower yield as compared to bonds issued after interest rates increased.

Types of Municipal Bonds

There are two types of municipal bonds, both of which are tax exempt. For investors who want to minimize their risk, these types of investments can be attractive.

  • Revenue bonds. These are issued to fund large and potentially costly infrastructure projects. Revenue bonds are supported by the future income that the project is expected to generate.
  • General obligation bonds. These are issued when immediate capital or revenue is needed in order to cover expenses. The issuer of general obligation bonds supports them using taxing power.

Longer-Term Municipal Bonds

Certain municipal bonds may not be traded on a regular basis. When you buy into one of these bonds, you are risking a longer-term investment instead of investing in a bond that you can sell at the end of a business day. It may be helpful to speak to an Owings Mills MD financial planner about the risks involved with these types of investments. When reviewing your overall portfolio, he or she can help review the various risks provide detailed information and advice.

If you would like more information about municipal bonds, contact a financial planner Owings Mills MD investors rely on for sound advice.