What are municipal bonds investing

Private activity bonds are a type of municipal bond used to finance certain qualifying public-private projects. Interest on qualified private activity bonds is exempt from the federal income tax, but can be subject to the Alternative Minimum Tax. What are the economic benefits of financing with municipal bonds?

Municipal bonds generally finance investments in fixed infrastructure, not ongoing expenses such as salaries or government benefits. These investments include: schools; acute care hospitals; roads, highways, and bridges; airports; subways; seaports and marine terminals; water and wastewater facilities; multi-family housing; libraries and town halls; electric power and natural gas equipment for city-owned utilities; and other public projects.

About 72 percent of bonds are owned by individuals directly or through mutual funds and the like. Three-fifths by investors over the age of Why do investors buy municipal bonds? Investors purchase municipal bonds because of the stability of the municipal bond market. State and local governments have issued bonds for centuries — they are a well-known and well — regulated financial instrument. Municipal bonds are an extremely safe investment.

The year default rate for corporate bonds is higher than 11 percent; but The year default rate for municipal bonds is just 0. Bond calls are less likely when interest rates are stable or moving higher. Credit risk. Credit ratings are available for many bonds. Credit ratings seek to estimate the relative credit risk of a bond as compared with other bonds, although a high rating does not reflect a prediction that the bond has no chance of defaulting. Interest rate risk. If bonds are held to maturity, the investor will receive the face value amount back, plus interest that may be set at a fixed or floating rate.

If they move higher, investors who hold a low fixed-rate municipal bond and try to sell it before it matures could lose money because of the lower market value of the bond. Inflation risk. Inflation is a general upward movement in prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest. It also can lead to higher interest rates and, in turn, lower market value for existing bonds. Liquidity risk. Many investors buy municipal bonds to hold them rather than to trade them, so the market for a particular bond may not be especially liquid and quoted prices for the same bond may differ.

In addition to the risks, what other factors should you consider when investing in municipal bonds? Tax implications.

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