Although municipal bonds provide many advantages, they also provide some risks and disadvantages. As an investor, you should understand the advantages and limitations of investing in municipal bonds to plan if they fit within your future or present financial condition.
Keep more of your earnings
The main benefit of investing in municipal bonds is the capability to keep more of your returns because of tax exemption. When you purchase a bond that is not exempt, you must pay taxes on your interest income. So, even though, you may earn an eight percent of return of your corporate bond, in actuality you earn less than that because of taxes. A municipal bond permits you to reject paying taxes on your interest income. In some cases, although the rate of return of a municipal bond is lower than the rate of return of a business bond, you can still earn more money interest investing in the municipal bond because of the cash you saved via the tax exemption.
Low price volatility
Tax-exempts bonds experience low price volatility, which makes them a remarkable investment for the objective of diversification. Although not fully risk free, municipal bonds are quite low-risk assets. Much of the low risk and price volatility of the bonds is derived from the municipalities’ credit ratings. The low danger and price volatility specs are mainly attractive to senior investors looking for safe investment to save their retirement income. Anyway, investors should research municipal bonds before making investment plans.
Interest rate and returns
Compared to other bond types, municipal bonds provide quite low returns. The low returns of municipal bonds come from the fact that they are quite short-term, low-risk investments. Municipal bonds are also subject to interest rate danger, meaning that as interest rates rise, the market price of municipal bonds down. The longer the term of your municipal, the more uncovered you are to interest rate danger. Like other bonds, a municipality may call back a municipal bond if interest rate constantly drops. In the mind of the municipality, it favors to call the bond and reissue it at a lower rate to reject paying you a higher rate of return.
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