The Huffington Post, May 24, 2016. A municipal bond issuer may be unable to make interest or principal payments, which may lead to the issuer defaulting on the bond. If this occurs, the municipal bond may have little or no value.
Municipal bonds are free of federal income tax. Municipal bonds also may be free of state and local income taxes for investors who live in the area where the bond was issued. If a bondholder purchases shares of a municipal bond fund that invests in bonds issued by other states, the bondholder may have to pay income taxes. It’s possible that the interest on certain municipal bonds may be determined to be taxable after purchase.
Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if municipal bond prices decline.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2018 FMG Suite.
The city of Detroit emerged from bankruptcy in 2014. Still, its previous inability to pay investors left some people questioning long-held assumptions about the relative safety of municipal bonds.¹ Without question, in the wake of Detroit’s troubles, gaining a better understanding of municipal bonds makes more sense than ever.²
At their most basic level, there are two types of municipal bonds:
Types of Risk
Both general obligation and revenue bonds share certain investment risks, including, but not limited to:
Investors seeking to manage their risk may want to consider investing in general obligation bonds with investment-grade ratings.
Bonds used to support essential services, such as water or sewage, are also considered less risky since these services are normally unaffected by economic conditions that may impact other revenue bonds, such as private activity “munis,” which fund projects by private businesses or nongovernmental borrowers.
In light of the widespread uncertainty about the fiscal health of municipalities nationwide, diversification may be more critical now than ever before.³
Because municipal bonds generally are sold in increments of $5,000 and may be subject to disadvantageous pricing for smaller investors, many individuals look to mutual funds to manage their municipal bond portfolio; they offer the diversification, research, analysis and buying power that most individuals can’t match.
Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.