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INVESTMENT • Read Time: 4 min

All Muni Bonds Are Not Created Equal

  1. General obligation bonds, which are a promise by the issuer to levy taxes sufficient to make full and timely payments to investors.
  2. Revenue bonds, which are bonds whose interest and principal are backed by the revenues of the project that the bonds are funding.

Types of Risk

Both general obligation and revenue bonds share certain investment risks, including, but not limited to, market risk (the risk that prices will fluctuate), credit risk (the possibility that the issuer will not be able to make payments), liquidity risk (muni markets may be illiquid and result in depressed sales prices), and inflation risk (the risk that inflation may erode the purchasing power of principal and interest payments). They also may share call risk, the risk that a bond may be redeemed prior to maturity.

Revenue bonds are considered riskier than general obligation bonds since they are only obligated to make repayments to the extent that the project funded by the bond generates the necessary revenue to meet payment obligations.

Managing Risk

Investors seeking to manage their risk may want to consider investing in general obligation bonds with investment-grade ratings.

Bonds used to support essential services, such as water or sewage, are also considered less risky. These services are normally unaffected by economic conditions that may impact other revenue bonds, such as private activity munis, which fund projects by private businesses or nongovernmental borrowers.

1. Freep.com (Detroit Free Press), 2020
2. Investopedia.com, 2020. A municipal bond issuer may be unable to make interest or principal payments, which may lead to the issuer defaulting on the bond. If this occurs, the municipal bond may have little or no value.
3. Municipal bonds are free of federal income tax. Municipal bonds also may be free of state and local income taxes for investors who live in the area where the bond was issued. If a bondholder purchases shares of a municipal bond fund that invests in bonds issued by other states, the bondholder may have to pay income taxes. It’s possible that the interest on certain municipal bonds may be determined to be taxable after purchase.
4. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if municipal bond prices decline.

The content is developed from sources believed to be providing accurate information.The information in the material in not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professional for specific information regarding your individual situation. The opinions expressed and material provided are for general information, should not be considered a solicitation for the purchase or sale of any security.

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