Municipal bonds

Municipal Bonds are debt obligations issued by the state or local government, created to support a government’s general financing needs or for a special project. Municipal Bond interest is usually free of federal tax, although it may be subject to the federal Alternative Minimum Tax. The interest received from the municipal bonds is often exempt from certain income taxes.

Municipal bonds investments can have a long-term impact on your income stream and your portfolio. Municipal bonds come in two ways: revenue bonds and general obligation bonds. Revenue bonds, are issued to fund infrastructure projects, and are supported by the income generated by those projects. General obligation bonds, are issued to raise immediate capital to cover expenses, and are supported by the taxing power of the issuer. Both types of municipal bonds are tax exempt and are attractive to risk-averse investors because of the high likelihood that the issuers will repay their debts.

The basic strategy for investing in municipal bonds is to purchase a bond with a good interest rate, or yield, and hold the bond until it matures. The next way involves the municipal bond ladder. A ladder consists of a series of bonds, each with a different interest rate and maturity date. As each one on the ladder matures, the profits are reinvested into a new bond. These strategies are categorized as passive strategies because the bonds are bought and held until maturity. Investors seeking to generate both income and capital appreciation from their bond portfolio may choose active portfolio management approach where bonds are bought and sold instead of held to maturity. This approach generates income from yields and capital gains from selling at a premium.