Bond Essentials
What are bonds?
Tax Benefits
Types of Bonds
Risks & Rewards
Understanding Yields
Bond Glossary
How Safe Are Municipal Bonds?
When you invest in any bond, your primary concern should be the issuer’s ability to meet its financial obligations. Issuers of municipal bonds have an outstanding record of meeting interest and principal payments in a timely manner.
Issuers disclose details of their financial condition through "official statements" or "offering circulars," which are available from your bank, brokerage firm, on the Internet or from a library of official statements. Issuers also provide continuing disclosure about their financial condition through nationally recognized municipal securities repositories. You may also contact the issuer or visit the issuer’s web site for ongoing information.
Another way to evaluate an issuer is to examine its credit rating. Many bonds are graded by ratings agencies such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. A number of banks and brokerage firms have their own research departments which also analyze municipal securities. Bond ratings are important benchmarks because they reflect a professional assessment of the issuer’s ability to repay the bond’s face value at maturity.
Generally, bonds rated BBB or Baa, or better, by Standard & Poor’s and Fitch, or Moody’s, respectively, are considered "Investment Grade," suitable for preservation of investment capital.
Credit ratings, however, should not be the sole basis for any investment decision. For example, the ratings do not take into account market trends. Before purchasing bonds with lower ratings, talk with your investment advisor to make sure they’re suited for you.
Tax-exempt municipal bonds offer you the chance to maximize your after-tax return consistent with the amount of risk you’re willing to accept. In general, as with any fixed-income investment, the higher the yield, the higher the risk.
Source: The Bond Market Association