Municipal Bonds: Profit from It

Municipal bonds are good investments when a few factors are combined and others considered. As the Fed showed no willingness of raising interest rates in September, which may occur in December if we are lucky, the window of profitability of municipal bonds is getting smaller. But as we are not there yet, you may want to invest in it. Here are a few facts to consider.

#1 Raising Rates

As stated in our article about bonds funds, yields and interest rates goes in the opposite direction because new-issued bonds have a higher coupon and therefore are more attractive. If interest rates goes down, your old bond will have a higher coupon and therefore fewer people will be willing to buy it, which will make the value go up. This fact should be take into account every time we talk about bonds - be it federal, muni or corporate.
A few days ago, among investors, there was a 50/50% opinion that the Fed would rise interest rates in September. Today, it's 20/80%. It may rise in December but it is unlikely as it will take time to the Shanghai composite to be stable and China to send the right signs of confidence and recovery.

#2 Tax Exemption

The main factor that drives investors to municipal bonds is that they are free from local, state (if bought from an in-state issuer) and federal taxes. Sounds good, right? Not so fast. As some of these bond issuers can be insured to protect themselves, they triple A rating can be misleading. You have to be sure their rating is made from a outside entity and therefore is not merely a facade, because the value of the bond can go down with liabilities. If you're getting rich and want to retiree tomorrow, It must be said that tax-exemption is important when applying to Medicare Part B and Medicare Prescription Coverage because as you have a higher income you will pay a addition premium amount (the " income-related monthly adjustment amount "). Check this link to know more.

#3 Risks

First of all, there is a risk that you are paying things without knowing it. Your broker can be paid through a markup over the cost of the bond and they are not obligated to state you that fact before you have you confirmation. Make sure you ask them the cost. Secondly, calling risk, which is when the issuer repays before the maturity, default risk and liquidity risk have to be considered. Make sure you know well the issuer of the bond, so it won't be a Detroit or Puerto Rico.