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What are Municipal Bonds?

To build your municipal bond portfolio, you need to understand what municipal bonds are compared to corporate bonds and stocks. Municipal bonds, often referred to as “munis,” are issued by state, county and city governments to raise money for public projects such as schools, highways and hospitals. Corporate bonds are issued by corporations to raise money for business expansion. Until the maturity date, you’ll receive interest, and upon maturity, the bond amount will be paid back. Stocks are riskier than either type of bond. If a company goes bankrupt, investors who bought bonds are considered creditors, and the bankruptcy courts give creditors precedence over stockholders.

Advantages of Municipal Bonds

There are a few advantages in creating a portfolio from municipal bonds rather than corporate bonds. First, municipal bonds are a safer investment than corporate bonds. Although corporations usually pay higher interest rates than municipal bonds, they run the risk of bankruptcy and being unable to pay back the bonds they issued. Another advantage is the income you receive from a municipal bond is usually tax exempt (you might see municipal bonds referred to as “tax-exempt bonds”). This is particularly beneficial for people in higher income tax brackets. Understanding these advantages can help when you’re building your portfolio and deciding which municipal bonds to buy.

Municipal Bond Portfolio Management

When investing in and managing municipal bonds, you can research bonds based on different factors such as the state and specific issuer, maturity (or call) date, the price and the interest rate (also called the coupon). Choosing bonds issued by your state or local government can be beneficial if they’re tax-exempt bonds. If you choose to have a professional manage your portfolio, consider their qualifications before you decide. Municipal bond portfolio managers should have a high rate of successful investments for their clients. It’s also important that they have the experience and time invested in the municipal bond market.

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