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Easy Overview to Municipal Bonds

Municipal Bonds

It is very expensive to ensure that a city remains operational and functioning effectively. Millions of dollars may be spent constructing buildings, repairing streets, and maintaining sewage systems. It is essential for schools and hospitals to remain safe, secure, and sterile.

A city will be required to establish funds to pay employees that work for the city. In many cases, a city may be spending more money than it has available. It may experience difficulty addressing its financial obligations, and when considering its options, a city may choose to begin issuing municipal bonds.

Municipal bonds can be issued by a county, a city, or a town. If one of these municipalities is lacking the finances to satisfy its responsibilities, it may elect to begin authorizing municipal bonds. A municipal bond is sold to an individual by a municipality. When an individual purchases a municipal bond, he/she is essentially providing the county, city, or town with a loan principal.

Much like a secured bond or a debenture, a borrower will be permitted to utilize the finances that have been provided by the lender. However, the borrower will be required to repay the lender for the loan when the duration of the bond expires.

When a county, city, or town issues a municipal bond, it will be required to pay interest on any loan that is granted. Therefore, a municipality will end up paying a lender more than the initial value of a loan. The lender will receive interest payments throughout the duration of the loan, but he/she will not be compensated for the principle value of the loan until the bond's specified maturation date. At this time, the lender will receive payment for the value of the loan.

Municipal bonds are generally considered to be wise investments, as a lender will be able to make a profit on a sum of money. In most cases, municipal bonds are a more secure investment than corporate bonds. Statistics indicate that borrowers default on municipal bonds less frequently than they do on corporate bonds. It is rare for a town or a city to claim bankruptcy. Therefore, an individual may purchase a municipal bond without unreasonable anxiety that he/she will lose on his/her investment.

One of the most attractive aspects of a municipal bond is that these types of loans are usually not subject to Federal or State taxes. In many cases, investors will opt to purchase corporate bonds because these types of bonds generally yield a larger profit through interest.

However, these investors often fail to take taxes into account. Therefore, once a lender pays taxes on a corporate bond, it is likely that he/she will receive less profit than if he/she had purchased a municipal bond. Also, municipal bonds are generally utilized to fund projects that are intended to improve a community. Therefore, by purchasing a municipal bond, a lender may be taking an active role in bettering the community in which he/she resides.

NEXT: Need to Know Facts About Government Bonds

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