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What are the current Municipal Bonds risks?
In today’s market, everyone interested in a good investment seems to have a bit of skepticism and doubt. However, somewhere along the line in history, the concept of investment seemed to exclude the realism of the element of risk. Municipal bonds risk can fluctuate on the risk grid, depending upon your choice of bond.
Municipal bonds have been linked to the more established venues of the economy. State, local and county government, building and company growth are just a few. The deficits and holes in the annual budgets have turned everything upside down for investors.
The type of bond selected can vary from: Non-insured, insured, callable, short term and tax free. Each type of bond has it’s own risk level that can be counterbalanced with the type of yield.
Insured bonds offer the least risk as they are backed by a third party in the case of company default on payments. While they have the least risk, they also have a lower yield.
Higher yields can be found in non-insured bonds. They are some of the riskiest of all as there is no guarantee that the company could default and your investment can be a complete loss. The municipal bonds risk on non-insured bonds are for those investors that love to gamble.
A short term bond can offer an interesting investment if you are looking for a faster turnover time. The yield is lower on those with a maturity date of three years (or less), but remain somewhat steady. The tricky part comes into play with possibly interest rate fluctuations in those of ten years or more.
The yield on the callable bond can be somewhat good if the call date has a longer term. If the date is too soon and there has been a decline in interest rates, this can become a high risk and poor yield choice.
If you choose to invest in tax free bonds, you have to do your homework. Many of the bonds that are initially labeled tax free can be changed at the whim of the IRS. This will require that either you or your investment counselor monitor the state of condition of the tax free bonds. Given today’s economic trends, the status could change at any time, based on the investment direction of the bond issuer.
There are two additional topics to consider for municipal bonds risk: Liquidity and underperformance. Liquidity is a situation where investors that are ready to sell are having problems finding buyers and they have to sell below market value. Underperformance is a condition in which you chose bad investments, hoping they would improve and yet they continue to underperform.
There are other factors that can affect municipal bonds. These are typical within the investment arena and must always be taken into consideration: General market risk is the downturn of an investment so that the value is less than the original purchase. Another topic to note is that one must monitor the inflation condition of the country. Inflation can create a situation of devaluing the original investment. Interests rates in general can push investors to sell before they intended to and lower profitability of the municipal bond market.
Anyone that is looking at municipal bonds for their investment dollar must know and understand that it is all in the timing. Yields can fluctuate based on timing and general global and government risk situations. This means you have to keep your eyes on the news, the weather and the market.
The information supplied in this article is not to be considered as medical advice and is for educational purposes only.
|Bond Investment7 Apr 2010