Back
davidlerner.com > Women and Finances  > A Unique Opportunity for Fixed-Income Investors

A Unique Opportunity for Fixed-Income Investors

For the first time in our nation’s history, it is now possible to buy a municipal bond with a higher credit rating and a higher yield than a Treasury bond. Not all municipal bonds are AAA-rated — muni bond ratings can range from AAA to below investment grade — but most are rated at least investment grade.

What Are Municipal Bonds?

A municipal bond is a type of fixed-income investment issued by state and local governments and their agencies to raise money for public projects like schools, hospitals, roads and bridges. The issuer agrees to make interest payments to bondholders at a fixed rate and repay the principal amount in full on a future date.

According to David Lerner Associates Executive Vice President William Mason, one of the biggest benefits of municipal bonds is their tax-free status. “Interest paid on muni bonds is generally exempt from federal income tax, as well as state and local income tax for residents. Historically, this has often made muni bonds a more attractive after-tax investment when compared with taxable corporate bonds.”

The current environment makes municipal bonds a potentially even more attractive investment. According to Mason, a New York City resident in the 35 percent tax bracket would need to earn 6.15 percent on a taxable Treasury bond to equal the tax-free yield of 4 percent on a New York City municipal bond.

“And don’t forget that municipal bonds can be an income-generating investment,” Mason adds. “If an investor purchases a $100,000 municipal bond that pays 4 percent interest, he or she will receive $4,000 a year in income that’s free of federal and possibly state and local income tax.”

Muni Bond Risks

It’s important to note that municipal bonds are not without risk. There are two primary risks involved in purchasing muni bonds. The first is credit risk, or the risk that a bond might be downgraded or the issuer might default and fail to repay the principal. The lower the bond rating, the higher the risk of a downgrade or default.

The second is interest-rate risk, or the risk that rising rates could erode bond prices. Bond prices have an inverse relationship to interest rates: When one rises, the other falls and vice-versa. If you have to sell a municipal bond before it matures, the price you receive will be based on the interest rate environment at that time. If rates have risen since you bought the bond, the price of the bond will be lower.

However, if you hold a municipal bond until it is retired at maturity, you will receive the bond’s face value. But if interest rates and bond yields have risen in the meantime, the value of your bond will be lower, in comparison.

There are other risks and factors involved in buying municipal bonds. For more details on these risks and to discuss whether municipal bonds might be the right investment for you, please contact David Lerner Associates at (877) 367-5960.

Your Investment Counselor

(ICname)
Skip to content