What are individual municipal bonds?

What is a municipal bond? States, cities, counties, and other local governments, as well as enterprises that serve a public purpose, such as universities, hospitals, and utilities, issue municipal bonds. They usually pay interest that is exempt from federal income taxes.

Can individuals own municipal bonds?

Who buys municipal bonds? About 72 percent of bonds are owned by individuals directly or through mutual funds and the like.

Are municipal bonds capital assets?

The Internal Revenue Service considers just about everything you own, from your home to your lawn mower, to be a capital asset. That includes your investment securities, such as your stocks and bonds. If you sell a capital asset, such as a municipal bond, for more than you paid for it, you have a taxable capital gain.

Who are municipal bonds suitable for?

Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems.

What are the types of municipal bonds?

There are two major types of municipal bonds: “general obligation bonds” and Investor Assistance (800) 732-0330 Page 2 “revenue bonds.” Because these types come in many varieties, you should look beyond the short-hand label when deciding whether to purchase. before making an investment decision.

What are the risks of investing in municipal bonds?

Investors in municipal bonds face a number of risks, specifically including: Call risk. Call risk refers to the potential for an issuer to repay a bond before its maturity date, something that an issuer may do if interest rates decline — much as a homeowner might refinance a mortgage loan to benefit from lower interest rates.

Who is a conduit for a municipal bond?

In addition, municipal borrowers sometimes issue bonds on behalf of private entities such as non-profit colleges or hospitals. These “conduit” borrowers typically agree to repay the issuer, who pays the interest and principal on the bonds.

How long does it take for a municipal bond to mature?

Short-term bonds mature in one to three years, while long-term bonds won’t mature for more than a decade. Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued.

What is the risk of holding a bond to maturity?

Interest rate risk. Bonds have a fixed face value, known as the “par” value. If bonds are held to maturity, the investor will receive the face value amount back, plus interest that may be set at a fixed or floating rate.