Municipal bonds are essential when a state or local government needs to fund a new project but doesn’t have the funds on hand? They issue municipal bonds to raise money quickly. This type of bond is issued directly by a state, city or local government body for the purpose of funding programs that will serve the local community. For instance, the government may use funds to fix roads, build new schools or invest in a local hospital so that higher-quality services are provided.
There are three main benefits to investing in a "munis”
1. Most of these bonds are exempt from federal taxes, and many are also exempt from state and local taxes. There are different taxation responsibilities with different categories of bonds, so make sure to read the fine print when investing for the first time.
2. These bonds are typically less risky because they’re issued by government bodies. The government is far less likely to go out of business or otherwise suffer hardships which interfere with their ability to make good on your investment. If you don’t like risk, you may see these bonds as a good long-term investment of your money.
3. Since many of these bonds are issued in support of community programs, you may feel you’re investing in your local neighborhood while earning profits. This gives you greater motivation to invest and increased satisfaction that goes beyond the money you earn at the end of the deal.
The exact payment structure for this type of bond can vary, but they generally operate with the following terms:
1. You invest a specified amount of money to buy the bond. This money goes directly to the government entity issuing the bond so that they can fund projects needed to support their local residents.
2. The government entity issuing the bond pays you a specified amount of interest on regularly scheduled intervals. In most cases, the payments are delivered semi-annually. This is your profit for investing in the bond.
3. When the bond matures, the government repays the total amount of your initial investment.
The catch here is that you get your profits before you get a return on your money. Once the maturity date is reached, the initial investment is returned to close out the deal. You can then reinvest that money or keep it in your bank to fund your own projects.
One common exception to the above structure of a municipal bond is the zero-coupon bond. This type of bond works more like a standard money loan because you don’t receive those incremental interest payments. You receive the amount of your initial investment plus the total interest due on your maturity date.
Consider a zero-coupon municipal bonds if you don’t have a lot of money to invest initially. These bonds often allow you to pay less than the total value of the bond in the beginning, making it easier to get started with bond investments.
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