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investing in long-term municipal bonds

company demand for municipal bonds has historically been driven by long-term secular trends, which have been less correlated with retail investment. Paul Malloy, head of municipal investments at Vanguard, said rising yields should benefit patient long-term investors. Benchmark: Bloomberg Municipal Managed Money Long Term Total Return Index investment grade, tax-exempt bonds, using a top-down process that aims to. NZD/JPY INVESTING IN THE STOCK

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NerdWallet, Inc. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances.

Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance.

We believe everyone should be able to make financial decisions with confidence. So how do we make money? Our partners compensate us. This may influence which products we review and write about and where those products appear on the site , but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services.

Here is a list of our partners. Higher earners may find muni bonds particularly useful as a way to minimize state and federal tax liability. Tiffany Lam-Balfour Sep 23, Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page.

However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money. The investing information provided on this page is for educational purposes only. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. Municipal bonds, often called "munis," offer investors a way to generate tax-free income in the form of interest payments from state and local governments.

Municipal bonds help finance projects such as roads, schools and other public works efforts. Like many other bonds, muni bond prices have gone down this year as interest rates have gone up. Still, tax-free municipal bonds may continue to be valuable to some investors. Higher earners may find them particularly useful as a relatively low-risk way to limit their state and federal tax liability, while people with more modest incomes might look for other investments that grow their overall wealth faster, even without the tax benefits.

While you get your entire initial investment plus some back if the bond is called, your income stream ends earlier than expected. Market Risk The interest rate of most municipal bonds is paid at a fixed rate. This rate doesn't change over the life of the bond. However, the underlying price of a particular bond will fluctuate in the secondary market due to market conditions.

Changes in interest rates and interest rate expectations are generally the primary factors involved in municipal bond secondary market prices. When interest rates fall, newly issued bonds will pay a lower yield than existing issues, which makes the older bonds more attractive. Investors who want the higher yield may be willing to pay more to get it. Likewise, if interest rates rise, newly issued bonds will pay a higher yield than existing issues.

Investors who buy the older issues are likely to do so only if they get them at a discount. If you buy a bond and hold it until maturity, market risk is not a factor because your principal investment will be returned in full at maturity. Should you choose to sell prior to the maturity date, your gain or loss will be dictated by market conditions, and the appropriate tax consequences for capital gains or losses will apply.

Buying Strategies The most basic strategy for investing in municipal bonds is to purchase a bond with an attractive interest rate, or yield, and hold the bond until it matures. The next level of sophistication involves the creation of a municipal bond ladder. A ladder consists of a series of bonds, each with a different interest rate and maturity date.

As each rung on the ladder matures, the principal is reinvested into a new bond. Both of these strategies are categorized as passive strategies because the bonds are bought and held until maturity. Investors seeking to generate both income and capital appreciation from their bond portfolio may choose an active portfolio management approach, whereby bonds are bought and sold instead of held to maturity. This approach seeks to generate income from yields and capital gains from selling at a premium.

Evaluating Stability vs. Fit Stability is a relative term in the municipal bond market. Municipal bonds tend to be safer than many other types of investments, but they are less safe than U. Treasury bonds. You can also trade in multiple kinds of municipal bonds, such as assessment bonds, revenue bonds, or general obligation bonds.

The issuer of the bond also matters; bonds issued from municipal authorities in a city with strong financials would be considered more stable than those from a city whose credit rating has been downgraded or has recently filed for bankruptcy. Plenty of investors make an understandable mistake during tough or uncertain times and develop tunnel vision about stability and safety. In their flight from risk, however, they fail to consider how an investment fits into their financial plans.

Municipal bonds can be a tax haven, often generating higher returns than Treasuries. They can still lose to inflation and tie up large sums of money for much longer than a recession typically lasts. Article Sources Investopedia requires writers to use primary sources to support their work.

These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

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