General Municipal Bond Information

General information about municipal bonds is important to have before choosing to invest in them. It is important to know that a municipal bond is a bond issued by a government agency, usually by the state. Issuers of these bonds consist of counties, school districts, cities or other governmental entities. Before investing in a bond, you will want to know what their purpose is, how they work and the risks involved.

 

What Is Their Purpose

The purpose of a municipal bond is to be utilized by a city or government agency at the state level for projects that are necessary, but require additional funding because there is not enough money in the budget. As a result of these bonds being government issued, it is typically required that the money be used on one time projects within three to five years of when they are issued. There are several rules and regulations surrounding the purchasing and use of these bonds varying from state to state. Municipal bonds are also subject to fixed or variable interest rates. The repayment terms are established and agreed upon by the issuer and the investor.

How They Work

When an investor purchases a bond, they typically provide a cash payment and agree upon a time frame of when the money is expected to be paid. This payment is then subject to certain rules around how it is to be used and what it can be used for. After purchasing the bond, the investor will typically receive payments from the issuer over time with interest of the invested principal, in addition to a return on the invested principal of the bond. Depending on the length of the bond, the investor may receive payments semi annually, or annually. These bonds are typically attractive to municipal entities because they are offered at a low interest rate.

Risks Involved

The risk the investor is taking in purchasing a municipal bond is trusting in the issuers ability to repay until the bond is paid in full. Upon purchasing a bond there are bond documents devised in efforts to clearly outline the expectations of the issuer and their responsibility in repayment. Each bond makes a promise to repay the monies in their bond documents by way of general obligation bonds, revenue bonds or assessment bonds. Each of the above listed clearly defines how the bond will be repaid to decrease the risk involved to the investor. One important piece of information for an investor to research is what the bond’s rating is. There are three main bond rating companies and they will issue a rating to the bond which indicates the probability of repayment in order to help the investor make an educated decision on their purchase.

Investing in a municipal bond is extremely helpful to local and state governmental agencies. These bonds provide them with a way to finance projects such as building schools, sewage systems and hospitals in order to benefit society in a positive way. By investing in a municipal bond you will have the opportunity to make money while helping society at the same time.

 

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