Municipal bonds have been long known as one of the safest investments a person can make, and the interest income is often tax-free. Additionally, municipal bond investments have the added boon of helping improve communities: the funds invested are often used by the government agencies to help build roadways, finance schools, and more. Most municipal bonds are issued in a minimum amount of $5,000, or in multiples of $5,000. Because of the special tax-free income status, most investors forgo a higher interest rate return on the bond in order to gain the tax advantage.
Bonds have historically has an extremely low default rate and are generally considered to be a safe investment. As The New York Times reports, even in the current financially unstable state of California, the state constitution mandates that bond holders must be paid, and are second only to primary education.
If you need to sell the bond before the maturity date, however, you may encounter problems. If you have a bond invested an entity that is encountering financial problems and you attempt to sell it early, you may not get your full investment back. Additionally, once bonds come to maturity, there is a risk of an entity paying off a bond holder with another bond.
Some analysts think that, because so many entities are having financial difficulties, now is the best time to buy bonds because the situation can only improve. They argue that you can purchase the bonds now for a great price, and by the time the bonds mature, the economy will have stabilized. Others believe the economy will not improve enough to improve the outlook for municipal bonds.
However, even at historically high default rates in 2008 and 2009, default rates were still less than 0.5%. Many analysts are still recommending bonds, but caution you should select your bonds even more carefully than you normally would. And, as always, diversification in your portfolio is key.
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