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How different types of municipal bonds work?
The municipal bonds market can be a highly regarded investment area, depending upon the types of municipal bonds that you choose. The well chosen municipal bonds can offer excellent rate of return along with tax free incentives.
Insured, tax free municipal bonds are the best investment of all as they are risk free. A municipal bond must achieve a specific rating to be insured. It equates to a rationale that if the bond issuer, for any reason, cannot make the interest and/or principal payments, the insurer steps in and makes the payment. It is therefore risk free for those investors that cannot afford any type of loss. The tax free status can total up some significant savings from a federal standpoint, but also from a state or city level.
Inflation adjusted bonds are one of the other types of municipal bonds. These are Treasury Protected Inflated Securities that adjust the value of the bonds every six months. Thereby insuring that the value of the bond does not become lower than the original investment dollars. These are low risk bonds and typically conservative and longer term. The consumer price index is used as the gauge to increase the value and is considered a good investment because the government has never defaulted. The risk occurs when it is an inflation adjusted bond attained through private entities. There is no guarantee that during an economic time of duress, the company will not fold.
Convertible bonds also have an advantage. The pricing is very competitive and is issued by a corporation or company and may be converted into common stock or shares at a future date. The convertible bond has interest that is referred to as yield. Typically this is lower than a standard company bond but gives you the flexibility however the conversion process often gives you the upper hand as it can convert to a value higher than the current stock value. This is one of the types of municipal bonds that can be considered as a better risk when investing in a company that has a proven track record.
Everyone hears the term portfolio diversity, but how does that relate to the types of municipal bonds? In short, it means that you invest in a variety of venues and companies. Keeping the investments diverse will help to guarantee lesser losses. In the case where one area loses, you will be offset by the gains of another. You might use an investment counselor to discuss the economic trends, but you can also simply watch the news and be aware of what society trends are doing. An example might be to invest in wireless technologies but also the newer 'green' companies that are experiencing incredible growth. The green trend is here to stay as we make headway toward a better global environment.
Any investor has to take a hard look at their personal situation to evaluate what will work for them. Conservative investments are longer term and usually yield slower increases, while risk oriented investments have better up front results but could take a downward turn creating a loss in the future.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.
|Bond Investment12 Mar 2010|