If you are thinking about municipal bonds as a primary investment, there are a considerable number of variables to consider. Every investment offers risks-versus-rewards scenarios, and depending on your stage in life and your personality, you might find this option to be more or less beneficial over time.
Bonds as a whole are typically considered to be a safer investment option and are often recommended to older investors who are closer to retirement. A municipal bond offers an investor potentially even more security than the usual corporate variety. That is because municipal bonds are a debt security issued by states, cities, countries and other governmental organizations. Government organizations offer investors bonds in order to gain financing for building schools, highways or sewer systems and other everyday projects.
Municipal bonds are paid back through revenue or tax payer dollars, adding to their overall security. However, even with so much security, there are risks to investing in a municipal bond. You should be aware of your finances when investing, as well as the conditions and contract of the municipal bond before signing. Cautious investing can help reduce risk if you are considering retirement in the near future.
There are risks you should be aware of before investing in municipal bonds. During the peak of the economic recession in 2008, states, cities and counties experienced financial difficulty paying the interest or principals to their bondholders. While many entities found solutions, there were a few municipal bond issuers that were unable to make payment. For example, Jefferson County, Alabama, defaulted on payments on $3.8 billion in sewer bonds in 2008, due to the numerous interest rate swap agreements that led to an increase in the county’s debt load, according to the U.S. Securities and Exchange Commission.
"The number of state funding ratios at the low end is startling," Peter Hayes, who heads BlackRock's municipal bond management committee, told TIME Magazine about the number of government agencies that were unable to pay their debt in 2008. "The prospect for even greater liabilities is a reasonable scenario if the country becomes trapped in a prolonged recession."
Another potential risk is inflation. If you purchase a municipal bond and prices inflate, you may end up paying a higher interest rate on the investment and yet receive a lower bond price.
Overall municipal bonds have bounced back as one of the premier secure investment options. If you are considering municipal bonds as a potential investment, you may wish to discuss it with a personal finance planner to make the most educated decision.