What Is a Municipal Bond
A municipal bond is similar to U. S. savings bonds in concept, but is issued by local governments, such as cities and states. Because of this,
there are some major differences, including the security of your investment, the differing interest rates, the method of payment, and the rate of
return. Because each of these things varies widely by the municipality issuing the bond, it can be difficult to define any one bond under a
blanket definition.
For example, some of these investments may function exactly like a Series EE savings bond, with a fixed amount of interest, paid out at a
certain time. Others may pay out the interest as it accrues, then pay only the principle when the bond comes to maturity. Some may come to
maturity in only ten years; others may take up to forty, or even more. Some are better investments than U. S. savings bonds; others aren't
anywhere near as good. The key to navigating the twisted world of the municipal bond with your sanity intact is to know exactly what you're
getting into before you sign anything; not after. Hindsight may be twenty twenty, but foresight uses reading glasses and pores over the fine
print.
Again, some of these investments may be exempt from taxes, but do your homework, and don't assume that one is simply because another was.
Details are important! Some bonds may earn you a better rate than certificates of deposit or U. S. savings bonds, or, again, they may pay you the
interest as it's earned, rather than compounding it--which means less money for you in the long run, but a small source of income in the
meantime.
In general, however, you're going to find that a municipal bond, unless you can find an extremely good investment, is going to be less
profitable for you--and often less secure--than U. S. Savings bonds or certificates of deposit. Compare them carefully, especially with savings
bonds, when you look at making the investment. Series EE savings bonds, for example, have a fixed interest rate now, but Series I bonds still
have a variable rate, which means there's no need to look to municipal investments if all you're looking for is a variable rate. Your financial
advisor will be able to give you better information on whether municipals might be right for you; talk with him and get his opinion before
purchasing one. Often, there are better options out there.
Above all, avoid these investments unless you plan to hold onto them long term. They often have a steeper penalty for early withdrawal than
any other investment except perhaps some certificates of deposit; a municipal bond may have its benefits, but it is not the place to put money
that you may need to access again in a few months, or even in a few years.
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