Wednesday, January 9, 2013

Municipal Bonds

In the United States we are lucky to have a small group of investments called Municipal Bonds or Muni's.
California State Capitol Building, tall building front collonade looking up to a high domed roof. Building set in parkland, looking across lawns and tall tree to left of image.
California State Capitol Building

These bonds are issued by public bodies such as cities and states to raise capital for public works, for instance a college wishing to raise funds for a sports stadium may issue a bond to pay for the coast by raising cash.

You buy the bond and receive income in the form of a dividend then after a period of time you may receive the face value of the bond when the appropriate repayment date is reached, or at any time you may sell your bond to the bond market for a sum of money.

This is very simplified of course but you get the idea.

You may invest in a single bond or in a Exchange Traded Fund (ETF). An ETF contains a basket of many bonds from across several grades and sources.

Most Municipal bonds dividends are free of both Federal and.or State income tax so provide a good source of income for anyone looking to increase tax-free income.

Many bond funds also pay dividends monthly so a regular income can be received.  Buying an ETF also allows you to spread the risk of any single bond failing to pay its dividend and so losing its value.

Buying bonds always carries risk so in the past I have spread the risk buying a single state bond fund and also a national bond fund on the  Wall Street market. Both funds have been free of all taces, at present Congress may change the tax liability of Municipal bonds, you should check as to liability at the time you decide to purchase.

Bond funds do require an original investment but if you are able to take advantage of dividend reinvestment plans you can rapidly increase the value of the account by buying more stock with each monthly dividend payment.

The value of bond funds does move up and down as the value of underlying bonds varies and as stock market conditions dictate so purchase value cannot be guaranteed over the short or long term. If you can leave the original investment alone for several years the likelihood is that you will profit from the purchase and the income bonds create.

Municipal bonds can play a role in any  Dividend Paying Portfolio   plan.

If you would like more information as to the possible benefits of Muni's to your plan for increasing residual income, consult a financial advisor who is familiar with your tax and investment liabilities. This blog post should not be considered financial advice for any individual or group of individuals.

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