How Safe are Municipal Bonds?

When you invest in a municipal bond, your primary concern should be the issuer’s ability to meet its financial obligations. Issuers of municipal bonds have a record of meeting interest and principal payments in a timely manner. Issuers disclose details of their financial condition through “official statements” or “offering circulars,” which are available through the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access (EMMA) portal at http://emma.msrb.org.  They may also be obtained from your bank, brokerage firm, or on the Internet. Issuers also provide continuing disclosure about their financial condition. You may also contact the issuer or visit the issuer’s web site for updated or current information.

Another way to evaluate an issuer is to examine its credit rating. Many bonds are graded by ratings agencies such as Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. A number of banks and brokerage firms have their own municipal bond research departments. Bond ratings are important benchmarks because they reflect a professional assessment of the issuer’s ability to repay the bond’s face value at maturity.

Generally, bonds rated BBB (Standard & Poor’s and Fitch) or Baa (Moody’s) or better are considered “Investment Grade,” suitable for preservation of investment capital.

Credit ratings, however, should not be the sole basis for any investment decision. Before purchasing bonds, talk with your investment advisor to make sure they’re suitable for you.

Tax-exempt municipal bonds offer you the chance to maximize your after-tax return consistent with the amount of risk you’re willing to accept. In general, as with any fixed-income investment, the higher the yield, the higher the risk.

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