Basics of Investing in Municipal Bonds

For risk-averse investors municipal bonds or “munis” offer a harbor in a storm of economic uncertainty and stock market volatility.

Muncipal bonds are typically backed by the tax raising ability of local or “muncipal governments”. They are usually issued to fund government projects such as road construction, waste water treatment plant construction, school construction and the like.

Unlike the investment portolio losses caused by recent stock market volatility investments in municipal bonds have offered a fixed, predictable income, usually with full or partially tax-exempt interest (especially important if the bonds are held outside of tax deferred IRAs), and a very low possibility of default. In other words, unlike investments in stocks or equities, your investment of principal – what you pay up front for municipal bonds – tends to be very secure.

When investing in municipal bonds it is important to research the demographics of a muncipality or city,  as well as its surrounding geographical area.  Investment risk can be a function of total population, population demographics (age and income),  diversity of the local economy (tax base, including both residential and commercial), and a history of on-time payments by the local government.

The minimum investment in muncipal bonds cant be very costly, often $5,000.

If you have the capital, the hard part is finding out where to buy them and if they are right for you.

Municipal bond traders and dealers must be registered with the Municipal Securities Rulemaking Board (MSRB). There over 2,500 registered dealers that are licensed to sell municipal bonds. They include bond dealers, banks, and nearly all full service brokerages.

Most major investment firms, such as RBC and Merrill Lynch, sell muncipal bonds.

Those who should invest in municipal bonds include those with high incomes and those who live  in States with higher income tax rates, such as California or New York.

Always ask your broker first for advice (make sure your dealer is registered wit the MSRB). Doe your best to assess all possible risks and understand the features of the bond. -Research the bond issue on your own to find the best prices and yields. Check websites like www.investinginbonds.com for price data.  Ask for legal documents like a prospectus that describes the security being offered and its terms.

By – Zania J. Faye

The Risks of Investing in Foreign Government Bonds

Muncipal bonds or “munis”, U.S. treasury bonds and most other forms of government bonds are, by comparison to other investments, usually considered safe and secure investments. However, not all governments are created equally and, therefore like all other forms of investments some government bonds carry greater risk. For example, foreign government bonds may be subject to greater investment risk as a consequence of the reckless or misguided fiscal policy of that sovereign nation.

Apart from Moody’s rating system what are the ways to determine if a foreign government bond carries unusual or unaccpetable risk?

Some ways to assess the risk-reward of foreign government bonds include consideration of the stability of the bond’s native currency, the long term or future prospects of government stability, and current events, both global and domestic, that can affect a nation’s economy.

The stability of the underlying currency of a bond can be a significant factor affecting bond risk. Some countries may attempt to offset the inflation/currency risk of their bonds by offering higher interest rates. One must be mindful of indications that inflation may strip away the benefits of a higher interest rate. This is not a risk solely associated with foreign bonds. All bonds have this “…risk of a loss of principal when interest rates rise”.

An investor can also look at the current events to simulate the risk of a government bond. Instability of the government can make the bond less appealing, and make it a riskier investment. Take, for example, how on May 24, 2010 Spain seized a “troubled regional bank”. This larger scale or “regional financial instability” created uncertainty and a lack of trust in the Spanish government’s ability to repay debts. Being part of the European Union (EU), Spain’s difficulties could/would affect all of its members, making uncertainty arise across all of its members.  Unlike the American government, which can print more money if there is trouble paying the owed bond, the Spanish government cannot print more money, since it is not just their currency.

A recent event that may illustrate how a bond could be riskier than one would expect would be the large scale labor strikes in Greece, along with its international rescue loans worth $140 billion.  Bailouts of this magnitude can cause trust to dissolve in the government and the taint may last for years or decades. Even if Greek government bonds were propped up by assurances from the central bankers of the E.U. it is likely that their bonds will be steeply discounted for the foreseeable future.

By – Domenic Gabriella

Basics of United States Government Bonds

Government bonds are an investment like and unlike any other bond.

Like corporate bonds, which may be used instead of public stock offerings to fund corporate expansions, U.S. government bonds are issued to, “help to finance the federal government”, which as you know is a vast enterprise. As long as elected government officials refuse to cut spending, or raise sufficent revenue by raising taxes, bonds will and must be sold by governments to meet their expenses. Fortunately, in the realm of government bonds, those issed by the United States are “…considered to be some of the safest you can buy” – at least for the foreseeable future.

As reflected by the recent public-government debt crisis in the nation of Greece not all governments are as reliable and secure in the prospect of the government paying or repaying their debts. However, in most cases, government bonds tend to be the safest type of bond offered anywhere, in any market.

To purchase a treasury bond an investor pays an initial price that can be at, higher or lower than the face value of a bond.

After purchase a treasure bond will “…pay interest every six months until they mature”. T-bonds have a set “maturity”, that is, a time of up to 30 years after which an invertor holding the T-bond is “paid its face value”.

The same set of facts that offer security to investors simultaneously limit or reduce the investor’s profit margins when investing in government bonds. The high level of security (in the principal or face amout of government bonds) is attributable to the bond’s backing by the “full faith and credit” of the United States taxpayers. As in the case of most investments the trade-off for security or “low risk” is moderate returns.

Government bonds, because of their high level of security, can be used to diversify investment portfolios and minimize risk for those looking to preserve capital, that is, one’s assets. This may be particularly true for babyboomer or those approaching retirement and wishing to have greater certainty about their ability to fund the lifestyle in retirement.

Another drawback, besides modest yields, is the long time it takes for a bond to mature since the principal investment cannot be regained until the bond is retired at its maturity. This can be up to 30 years down the line unless the bond is resold.

The trading of bonds, pending maturity, will likely result in a transaction fee paid to a broker or a bank, effectively reducing the money that they would otherwise have been received if the investor held the bond until maturity.

There are even new “…inflation-indexed bonds (I-bonds) which were created to reassure investors by helping to protect I-bond purchasers from the effects of future inflation. I-bills are ideal for those who are content with safe, small returns, regardless of inflation.

If interested, one can, “purchase some U.S. bonds through brokers and banks or directly through the Federal Reserve Banks”.

By – Domenic Gabriella