Municipal Bond funds - Are muni bond funds really that lucrative?

Summary: This article highlights what municipal bond funds are, different categories, risks and advantages of these funds.

Related Articles: investment bonds, Junk Bonds, municipal bond interest rates

Common mispellings: muicipal bonds, municipal bond , municpal bonds



Are these tax exempt bond funds?

Municipal bonds, or "muni" bonds as they are sometimes called, are issued by a regional government such as a state or city municipality. They are extremely popular, with a holding number greater than 5.1 million households. Because they are often sold to support the cost of city or local improvements, such as bridges, roads and sewer systems, Municipal bonds are tax-exempt bonds and will sometimes be referred to by this name. Muni bonds are sold in increments of $5,000, repayable within a time range of nine months to over forty years. Those who are involved in municipal bond trading are also investing in the community. Instead of being traded on the stock exchange, they are sold over-the-counter at banks, credit unions and other financial institutions.

Insured municipal bond investments

There are two categories of municipal bonds, general obligation issues and specific revenue obligation issues. The general obligation issues are backed by federal or state aid, and as such are more secure than specific revenue issues, which can only be guaranteed with the funds that are generated due to a specific project. For example, a bond issued specifically for the building of a new bridge can be paid from the tolls generated after that bridge is completed.

Some of the benefits of owning a municipal bond over other kinds of securities include:

" Insurance: Many municipal  bonds are insurance-backed, meaning that in case something happens to the issuer, the principal and interest balance is guaranteed to be paid.
" Liquidity: These kinds of bonds can be sold easily over-the-counter, even before they have reached maturity.
" Involvement: An investment in municipal bonds supports local community development as well as providing investors with potential profit.
" Taxes: These kinds of bonds are generally tax-exempt at the federal and state level.

There are, of course, risks involved in purchasing municipal bonds, especially those that are specific revenue issues, as they still rely on the credit-worthiness of the agency that issued them. So, please check municipal bond ratings before you make any trades. In addition, municipal bonds can be retired before their maturity and are subject to the same interest rates as other kinds of securities.