A Short Primer on Muni Bonds

May 07, 2023

Municipal bonds, also known as "munis," are debt securities issued by state and local governments or their agencies to finance public projects such as schools, hospitals, and infrastructure. These bonds are a popular investment option for those seeking tax-free income, as the interest earned from municipal bonds is generally exempt from federal income taxes and in some cases, state and local taxes as well.

Municipal bonds come in various forms, including general obligation bonds and revenue bonds. General obligation bonds are backed by the full faith and credit of the issuer, meaning that the government entity issuing the bond has pledged to use all available resources, including tax revenues, to repay the bondholders. Revenue bonds, on the other hand, are backed by specific revenue streams, such as tolls or fees from a particular project or facility.

Investors in municipal bonds can either purchase individual bonds or invest in a mutual fund or exchange-traded fund (ETF) that invests in municipal bonds. Mutual funds and ETFs can provide diversification and professional management, but also come with fees and expenses.

While municipal bonds are generally considered to be a relatively safe investment, they are not without risks. One risk is that the issuer may default on its obligation to repay the bondholders, although this is rare for municipal bonds. Another risk is interest rate risk, which is the risk that the value of the bond will decline if interest rates rise. Additionally, certain types of municipal bonds, such as those issued by distressed municipalities or with lower credit ratings, may have higher default risks.

Before investing in municipal bonds, it is important to carefully evaluate the creditworthiness of the issuer and to consider the potential risks and rewards. Investors should also be aware of the tax implications of investing in municipal bonds, including any potential impact on their overall tax situation.

In summary, municipal bonds can be a valuable addition to a well-diversified investment portfolio, particularly for those seeking tax-free income. However, investors should carefully consider the risks and rewards before investing in municipal bonds. Please reach out to us if you would like to discuss the merits of muni bond investing and whether they are right for your portfolio.