Sometimes it is confusing what investors should consider when investing in municipal bonds. Some investors look at municipal bond rates while others look more closely at different characteristics of municipal bonds. Many investors calculate bond yields which take into consideration the price of the bond as well as the time to maturity. The municipal bond rates do not take into account the maturity dates or the prices of the bonds.
Municipal bond rates are coupon rates of the municipal bond. They are the rates that the issuer set at the time of the issue how much they will pay investors for the money borrowed. When a municipal bond issuer issues a bond, the issuer works with the underwriters to come up with the appropriate interest rates, the municipal bond rates, to satisfy the issuer's financial needs taking into account the market demand and supply. The municipal bond rates stay the same throughout the life of the bond.
A bond can have many different characteristics from other bonds. Different characteristics lead to different risk level and rate of return. When a bond carries higher risk, the investor expects to be paid more for buying that bond. For example, a municipal bond that matures in 10 years time should have higher interest rates than a municipal bond that matures in 1 year because money tied up for 10 years is riskier. However, usually municipal bond rates do not correlate with length of time to maturity.
While the municipal bond rates may stay the same for all maturity dates, the yield of the municipal bond should be different. This is why advanced municipal bond investors look at municipal bond yield more than their interest rates. The yield calculation takes into account factors such as the maturity date and price, unlike the coupon rates.
There are many types of yields that can help investors decide which municipal bonds to buy. The municipal bond rates are use when calculating municipal bond yields. Usually, the higher the municipal bond rates, the higher the yield, but not always. The price of the bond as well as the time to maturity play important roles in calculating the yield.
The price of a municipal bond can make the bond less attractive even when the interest rate is high. Municipal bonds can be bought at par, at premium or at a discount price. If an investor is paying more for the bond, buying it at premium, the investor should be compensated with high enough interest rates so that in the end the investor comes out ahead. For example, a $100 investment that pays you $1 for 10 days and also $100 at the end is better than a $30 investment that pays you $1 for 10 days and only $10 in at the end. For an investor to invest $30, the bond needs to pay more than $1 a day or pay for longer than 10 days. This shows that considering municipal bond rates alone is not adequate.
The time to maturity is also important when figuring out if a particular municipal bond is a good investment. For example, if you have to wait five years to get your $10 investment back, it is riskier than if you had to wait only 1 year. After all anything could change in five years. What is a good investment today may not be in five years time and you would have locked in your money in a bad investment. Good municipal bond rates today may not be good in a years time.
Since there are many factors that you should consider when investing in municipal bonds, looking at the municipal bond rates alone is not enough to find out if they are good investments or not. Municipal bonds with very low rates can still be a good investment if everything else fall into place such as if the price is extraordinarily low or the time to maturity is short enough so that the yield skyrockets.
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Municipal bonds have constantly been a favorite way of investing for the very richest people worldwide for over half a century. To learn more about Municipal Bond Rates, click over to Investing Tax Free today.
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