Tax-Free Municipal Bonds
June 25, 2009 by MOYMJennifer
Filed under Investing
Municipal bonds, also known as “Munis,” are investment tools that have guaranteed payments with interest earnings.
These are issued by municipalities that wish to raise capital for projects such as schools, roads, bridges, healthcare, or other benefits to its citizenry. They are tax-free because of the federal government’s stand that it is for the benefit of the constituents.
There are two types of Municipal Bonds:
1. General Obligation Bonds. These are IOU’s that are backed by the taxing power of the issuing agency. A municipality with a lot of business establishments is more capable of paying off these IOU’s than one with a small population.
2. Revenue Municipal Bonds. These are issued by an agency, commission or authority that is created by the local council, such as water agencies, light and power, and other utilities. It is guaranteed by the revenue that these businesses will generate.
Although it is quite tempting to bite tax-free munis, one must do a little research before jumping into investing. First, you must take a look at the credit rating of the municipality. Do credit agencies have high confidence in them?
Second, take a look at their area of jurisdiction. Is it a growing community or one that is over crowded? What are the plans of the city for the future? Do they have goals that they are trying to reach? If so, do these coincide with a progressive outlook?
As with any type of investment, it pays to know potential risks against the returns you will get.
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