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What is a Municipal Bond?


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What is a Municipal Bond?

Our financial advisors can lead you in the right direction when considering investments in municipal bonds! First, what is a municipal bond? A municipal bond is a debt obligation offered by a state government or municipality that uses the loans to provide funding for public projects, such as: the construction of schools, hospitals, and highways. Most of the time, your municipal securities are exempt from federal income taxes, and often from state or local income taxes.

Municipal bonds generally have a low default risk. There are rarely defaults in the municipal bond market. Only 80 municipal bonds have defaulted during the time period of 1970-2014. Municipal bonds have certainly shown strength over time, but they are not completely risk free. There are other risks when considering investing in municipal bonds, such as: call risks and liquidity risks. With a call risk an issuer can redeem the bond before the maturity date, so that the investor is losing out on more potential income. This is not desirable for the bond holder. The other risk is with liquidity, or lack of. The market of a specific municipal bond may not be traded on a regular basis, which is the case for many municipal bonds. Therefore when you buy into one of these bonds you are risking a more long-term investment, versus investing in a bond that you can sell at the end of a business day like with mutual funds. Talk with your financial advisor about the risks involved with these types of investments.

If you need more information about municipal bonds contact CIC Wealth today; our financial advisors are here to help.