What type of investors buy municipal bonds

Annual advisory fee 0. Was this article helpful? Share your feedback. Send feedback to the editorial team. Rate this Article. Thank You for your feedback! Something went wrong. Please try again later. Best Ofs. More from. By Kat Tretina Contributor. Information provided on Forbes Advisor is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circumstances.

We do not offer financial advice, advisory or brokerage services, nor do we recommend or advise individuals or to buy or sell particular stocks or securities. Performance information may have changed since the time of publication. Past performance is not indicative of future results. Forbes Advisor adheres to strict editorial integrity standards. To the best of our knowledge, all content is accurate as of the date posted, though offers contained herein may no longer be available.

Miranda Marquit Contributor. Benjamin Curry Editor. The Forbes Advisor editorial team is independent and objective. According to the chart, you would need to earn 5. Those listed above are for The above chart also reflects the tax brackets and rates of the Tax Cuts and Jobs Act, which was signed into law on December 22, and is effective from January 1, Alternative Minimum Tax. The AMT is a secondary income tax system, which has its own set of rates and rules, separate from regular income tax.

Taxpayers are required to determine their tax liability under both the regular income tax and the AMT and to pay whichever is greater. Under the AMT certain deductions and exemptions are disallowed, including the exemption for interest on private activity municipal bonds. A method of recording and transferring ownership of securities electronically, eliminating the need for physical certificates.

The feature of a bond that denotes the interest rate coupon rate it will pay and the date on which the interest payment will be made. Coupons are generally payable semiannually. A failure by an issuer to: i pay principal or interest when due, ii meet non-payment obligations, such as reporting requirements or iii comply with certain covenants in the document authorizing the issuance of a bond an indenture.

The amount by which the par or face value of a security exceeds its purchase price. Face or Par or Principal. The principal amount of a security that appears on the face of the bond. High-yield bond or junk bond.

Due to the increased risk of default, these bonds typically offer a higher yield than more creditworthy bonds. The entity, typically a government or a government agency or authority, which initially offers bonds for sale to investors. Often, the issuer is also the party responsible for making interest and principal payments on a bond, although sometimes that may be a different entity. Liquidity or Marketability. A measure of the relative ease and speed with which a security can be purchased or sold in a secondary market.

The date when the principal amount of a security is due to be repaid. Short-term bonds to pay specified amounts of money, secured by specified sources of future revenues, such as taxes, federal and state aid payments and bond proceeds.

Offering document Official Statement or Prospectus. The disclosure document prepared by the issuer that gives detailed security and financial information about the issuer and the securities being issued. The amount by which the price of a bond exceeds its par value. Private Activity Bonds. A PAB is a type of municipal bond that is issued by a government entity where more than 10 percent of the proceeds are used by a private business and more than 10 percent of the debt service is secured by a private business.

In general, the interest on PABs cannot be tax-exempt unless the transaction meets certain criteria established in tax law.

PABs are generally used in the context of public-private partnership transactions, for certain housing and economic development purposes, and other qualified uses. Designations used by credit rating agencies to give relative indications as to opinions of credit quality.

Collateral pledged by a bond issuer debtor to an investor lender to secure repayment of the loan. Registered bond. A bond whose owner is registered with the issuer or its agent either as to both principal and interest or as to principal only.

Transfer of ownership can only be accomplished when the securities are properly endorsed by the registered owner. Variable rate bond. Both general obligation bonds and revenue bonds are tax-exempt and low-risk, with issuers very likely to pay back their debts.

Buying municipal bonds is low-risk, but not risk-free, as the issuer could fail to make agreed-upon interest payments or be unable to repay the principal upon maturity. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Articles.

Corporate Bonds Prospectus of Corporate Bonds. Partner Links. Related Terms Gross Revenue Pledge Definition Gross revenue pledge is a stipulation in a municipal bond indenture that compels the issuer to use the bond's revenue to service the debt first.

What Is a Catastrophe Call? A catastrophe call is a call provision in municipal bonds allowing for an early redemption if a catastrophic event occurs that causes damage to the project being financed.

Special Tax Bond Definition A special tax bond is a type of municipal bond that is repaid with revenues derived from a tax that is levied specifically for that purpose. Net Revenue Pledge Net revenue pledge requires the issuer of a municipal bond to use generated revenues to service debt costs after satisfying operational expenses. What Is a Public Purpose Bond?

A public purpose bond is used by municipalities to finance public works as opposed to private purpose bonds. What Is an Authority Bond? An authority bond is a security issued by a corporate or government agency to finance the operations of a revenue-generating public business.

Investopedia is part of the Dotdash publishing family. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.

We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. If you purchase a bond and later interest rates rise, you are locked into receiving a return less than what you would receive by buying a new bond at the higher interest rate. Thus, the price or market value of your bond falls as your bond is worth less. Call risk: Some muni bonds are callable, which means the issuer can decide to repay the bond earlier than the maturity date.

When interest rates fall, an issuer with the ability to call their bond may choose to do so because the issuer can save money by refinancing or reissuing another bond at a lower interest rate. If you think they have a place in your portfolio, there are a few ways to get started. You can buy individual muni bonds or muni funds in your online brokerage account, and many robo-advisors offer munis as part of their portfolio mix.

Individual bonds: Many investors purchasing muni bonds have a buy-and-hold strategy, intending to hang on to them until maturity. These investors can research and select bonds that work best for their portfolio in terms of risk and return, maturity date and tax benefits.

Municipal bond ladders: When you purchase an individual bond and hold it, you don't get your principal back until the bond matures. Some muni bonds mature in one to three years, while others mature in 20 or 30 years. Investors needing regular income might consider buying multiple bonds and building a ladder, with bonds maturing annually or in whatever time increment that fits their situation and cash flow needs.

Muni funds: For those who might not feel comfortable picking municipal bonds on their own, investing in munis through mutual funds or exchange-traded funds , also known as ETFs, can make sense.

One benefit is accessing a well-diversified portfolio of bonds from municipalities with different credit ratings, a range of projects and bond types GO or revenue , and varied risk and return. This lessens any potential default risk as you spread your dollars across many bonds. Another benefit is shifting the onus to someone else well-versed in municipal bonds, namely the fund manager, to keep tabs on the municipalities and related risks for you. Some investment management companies offer state-specific funds so investors can benefit from both federal tax exemption as well as state and local tax exemption.

How muni bonds work. Types of muni bonds. General obligation bond.