The Basics of Muncipal Bonds – Part 2

To maintain infrastructure is a vital necessity to governments, and can be costly to do.  This need brought about a new way to invest: municipal bonds.  These bonds have less risk than other investments; one can easily check the issuing governments previous success on repaying its obligations, as well as what others who have purchased the municipal bonds thought.

The basic idea of the municipal bond is to “…to raise money for public purposes—such as building schools, highways, hospitals, sewer systems, and other special projects” (http://www.sec.gov/answers/bondmun.htm).  These bonds can be issued from “states, cities, counties, and other governmental entities” (http://www.sec.gov/answers/bondmun.htm).  Many sales of municipal bond vary and so each must be analyzed on its own.

Municipal bonds are issued by governments, so the odds of repayment are relatively high.  However, “…while munis have historically been considered relatively conservative investments, they do, like all bond investments, carry risk” (http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/Bonds/P118923).  Some people overlook this risk because it is a government who is indebted to them, but just like any company, a government can default on a loan.

Another concern when investing into municipal bonds is the lack of information available about them.  This is due to the fact that, “many municipal bonds trade infrequently” (http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/Bonds/P118923).  Also, each batch of municipal bonds is unique, so when researching, one may have to “rely heavily on the credit ratings assigned by various credit agencies” (http://beginnersinvest.about.com/cs/municipalbonds/a/aa071502.htm).  The other way to make a more informed decision is to check out “…1.) who is responsible for servicing the interest payments on the bonds, and 2.) the underlying economics of the issuer” (http://beginnersinvest.about.com/cs/municipalbonds/a/aa071502.htm).  From the ‘Security Analysis’ of 1942, “Benjamin Graham recommended municipal bonds possess…population of 10,000 or greater…diverse economy… history of punctual payment on past obligations” (http://beginnersinvest.about.com/cs/municipalbonds/a/aa071502.htm).  Following these guidelines when researching municipal bonds should ensure that the risk (already minute) is minimized as much as possible before one invests.

There are many sites where one can get a better background on municipal bonds.  Some offer the basic outline of municipal bonds and then stem off to other more specific readings. This is one example of such a site: http://beginnersinvest.about.com/cs/municipalbonds/a/aa071502.htm.  Other good sites to reference are the sites that rate municipal bonds, such as Standard & Poor (S&P).  Their site http://www.kennyweb.com/kwnext/mip/pi/pidirectorycurrent.html has a listing of all “…bonds held by managed municipal bond fund customers of Standard & Poor’s Securities Pricing, Inc.” (http://www.kennyweb.com/kwnext/mip/pi/pidirectorycurrent.html).  Such a site can help with assessing the safety of the bond, but no matter how much risk one tries to remove, it is important to remember there will always be uncertainty and thus always some degree of risk.

Books on Municipal bonds are available on various websites.  One can find a listing of books and from the Library of Congress, which provides an extensive library of for reference on the topic of municipal bonds: http://www.loc.gov/fedsearch/metasearch/?cclquery=municipal+bongs&search_button=GO#query=%28municipal%20bonds%29&filter=pz:id=lcweb|ammem|catalog|ppoc|thomas.   Other books can be found on Amazon, such as ‘Keys to Investing in Municipal Bonds (Barron’s Business Keys)’ (http://www.amazon.com/Investing-Municipal-Bonds-Barrons-Business/dp/0812095154). Another site with a library of books on the subject of municipal bonds is Wilson White & Co. that can be found here: http://www.municipal-bond-expert-witness.com/WW/template/main/index.php?books.php.

Municipal bonds may not be offered by any one entity regularly, government deficits speak for the demand for money by governments. Municipal bonds can become a great investment with low risk and fair returns if one puts in enough effort to review the various opportunities they have.

By – Domenic Gabriella