Municipal bonds look good to the investor because municipal bonds are free of federal taxes and can be free of state taxes if bought in the investor’s own state. Cities, counties, and state governments issue municipal bonds for major building major projects for their communities such as schools, highways, or hospitals.
Municipal bonds may even be tax exempt when it comes to personal property tax. Do you live in a high tax state? Investing in municipal bonds might be an excellent choice for your investment dollars.
In addition to the tax advantages and the potential interest income, municipal bonds may be of interest to your because of the relative safety of this kind of investment. When you look into the projects in your area that are being funded by municipal bonds, you might be all the more interested and want to help support projects that directly improve roads or schools in your area. You might find that some of these projects directly or indirectly benefit you business interests.
There are General Obligation bonds and Revenue Bonds. General Obligation bonds, with the appealing nickname of GO Bonds, are backed by the fact that city, county, or state has the advantage of being able to raise revenue through taxes.
Revenue municipal bonds are offered by an entity at the city, county, or state level. A utility company such as a water company is a good example of such a revenue municipal bond. That utility, that business, has an obligation to pay the interest and does so from the revenues that come in from the business. In this case, the income is generated as customers pay their water bills. This revenue goes toward paying the bond holders.
TIPS and OTHER POTENTIAL BENEFITS OF INVESTING IN MUNICIPAL BONDS:
1. Get information about the bonds offered:
a.) Who will be servicing the interest payments on the bonds?
b.) What is the economic health of the issuing city, county or state? Factors contributing to good economic health are whether the state or local government, as a community, is prospering and growing, has diversity, can show a solid payment history on prior financial responsibilities, and currently has a population of at least 10,000 residents.
2. Look at neighboring states, cities, or counties. Perhaps a neighboring state, city, or county has developed reciprocity agreements. Such a reciprocity agreement may make bonds from these neighboring jurisdictions available on a tax-exempt basis as well.
3. Changes in interest rates affect municipal bonds. If the current interest rates go down, investors will benefit by an increase in the value of their bonds. The flip-side is also true. an example of bond values in relationship to fluctuating interest rates.
4. If you are in a higher income bracket, municipal bonds might be an especially good investment for you.
Explore the municipal bond purchase opportunities in your state and see what they can do to improve your financial picture in the short-term and in the long-term.