Risks of Municipal Bond Investing

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If you want to invest in munis. You must plan to hold bonds to maturity date. Municipal bonds are not device. You want to buy with plans to sell bonds before maturity date. In other words, municipal bonds are buy and hold investments. Thus Municipal bonds interest rates. For more details see where to buy municipal bonds.  Also you can see government and corporate bonds benefits.

What Are Some Of Risks Of Investing In Municipal Bonds?

There are number of risks to bond investing. Some are not as significant as others. More risk you take. You can generate high yield and more income. There is no such thing as free lunch in bond market. So if you are able to earn high yield you are taking more risk.  Thus you are going to focus on risks that will impact you if you plan to hold bonds to maturity. You can check Municipal Bond Rates.

Call risk

Call risk refers to potential for an issuer to repay bond before its maturity date. But issuer may do if interest rates decline. And homeowner might refinance mortgage loan to enjoy lower interest rates. See Benefits of investing in bond in India

Bond calls are less likely when interest rates are stable or move high. Many municipal bonds are “callable,” bonds. So you want to hold municipal bond to maturity. Then you can research bond call provisions before making buy.

Credit risk or default risk

This is risk that bond issuer may experience financial problem. That make difficult or impossible to pay interest and principal in full. This means failure to pay interest or principal is referred to as “default”. Thus you can check types of municipal bonds (Not posted)

Credit ratings are available for many bonds. Also Credit ratings seek to estimate relative credit risk of bond as compare with other bonds.  And high ratings do not reflect calculation that bond has no chance of default. Thus you can also see difference between corporate bonds and municipal bond. For more information see municipal bond in India.

Interest rate risk

Bonds have fix face value known as “par” value. If bonds held to maturity you will receive face value amount back plus interest. And that may be set at fix or floating rate. Bond market price will move up as interest rates move down.

And it will decline as interest rates rise, so that market value of bond may be more or less than par value. U.S. interest rates have been low for some time. If you hold low fixed-rate municipal bond and try to sell it before it matures can lose money. Because of lower market value of bond.

Inflation risk

Inflation is general upward movement in prices. Also Inflation reduces buy power which is risk for you to receive fix rate of interest. It also can lead to high interest rates. And, in turn lower market value for existing bonds.

Liquidity risk

This refers to risk that you will not find an active market for municipal bond. It prevents them from buy or sells when they want certain price for bond. Many will buy municipal bonds to hold them rather than to trade them. So market for particular bond may not be liquid and quote prices for same bond may differ.

How They Work

Municipal bonds pay interest twice year. Bond issuers repay principal on bond’s maturity date. Those one to three years for short-term bonds. And ten years or more for long-term bonds. Municipal bonds work best for investors who need tax-free revenue stream. Those are high income-tax bracket. As result, they have lower interest rates than tax bonds.

You can buy them from register municipal bond seller. You can also own them through municipal bond fund. In past, very few cities defaulted. Municipal bonds are consider very low risk. Most individual municipal bond holders do not sell in life of bond. But those that do find price of bond itself changes based on supply and demand in open market.

Finally, check municipal bonds advantages and disadvantages. And also see municipal bonds interest rates. For more details check municipal bond examples. Thus check general obligation bonds tax exempt.

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