California Municipal Bonds: Pros and Cons
California municipal bonds have both pros and cons, and while they may be ideal for some investors they may be a bad choice for others. Municipal bonds are those issued by states, cities, and local government entities, and there are often tax advantages with these types of investment. Investing in municipal bonds is usually preferred by investors who choose a low degree of risk, as well as investors who want to diversify their investment portfolio and lower overall risks. Each state offers this type of bond to investors, and each of these bonds are rated by the credit rating agencies to identify the risk level and credit worthiness of the issuing entity. California municipal bonds are offered by the state of California, and can give some advantages to California residents that investors outside of the state will not see.
Pros: The best municipal bonds are those that receive the most tax benefits possible. One of the pros for California municipal bonds is that investors who reside in the state may see double or even triple tax benefits. Municipals are normally exempt from federal taxes, and residents who invest in these bonds offered by the state they live in are also normally exempt from state taxes on this investment income. City bonds provide a third exemption for city residents, making the investment income triple exempt.
This is also true with Florida municipal bonds and those offered by other states as well. Municipal bonds carry very low risks of default, and the income from them is usually secure, making them more secure than many other bond types.
Cons: Municipal bond interest rates can fluctuate, depending on the economy. One of the disadvantages to this is that new bonds issued by the state government may offer a better rate than California municipal bonds offered last year or two years ago. The economic problems of California make the its municipal bonds the lowest rated in the country. This does increase the risk level a little when compared to investing on the bonds of other states instead.
California municipal bonds currently offer more cons than pros in the light of severe state’s budget deficits.