Municipal Bond Interest Rates – What to Look For?
Investing in municipal bonds generally carries much lower risks compared to putting your money into the stock market. Unfortunately, municipal bond interest rates are significantly lower than interest paid on stocks or mutual funds. Each individual investor makes a decision on what his investment strategy should be: higher risk with higher returns or lower risks but much lower returns.
If you are a rather conservative investor not willing to put your money into the volatile stock market, bonds along with zero coupon municipal bonds might just be right for you. Knowing what to look for in municipal bond interest rates will help you make an informed decision and which best municipal bonds to go for.
The most basic strategy is picking bonds with the highest interest rates that will generally be fixed rate with maturity periods ranging from 3 to 30 years. You municipal bonds interest rates income is to be paid semiannually unless it’s a zero coupon municipal bond, in this case your interest earnings are due at the end of the maturity period. Most interest income paid on municipal bonds is tax exempt and helps fund development of a certain state or city.
All municipal bonds are backed up by full faith and credit power of the authority who issued them, it’s essential investors assess their bond risk by checking all bonds’ ratings provided by three major rating agencies before they decide to invest into a certain bond. Rating scores can be as high as AAA and as low as D for issuing authorities who defaulted on their obligation promises.
In addition to picking the most attractive municipal bond interest rates, one can maximize bond investment strategies by creating a so called bond ladder. The basic principle of a bond ladder is centered on investing into a variety of bonds with different interest rates and maturity periods. As soon as any given bond matures, the principal payment along with earned municipal bond interest income gets reinvested into a new bond creating a constant stream of passive income.
Read our article on high yield municipal bonds that are worth looking into.