‘Munis’ can still work for you — even in tough times - Ahwatukee Foothills News: Money

default avatar
Welcome to the site! Login or Signup below.
|
||
Logout|My Dashboard

‘Munis’ can still work for you — even in tough times

Print
Font Size:
Default font size
Larger font size

Related Stories

Posted: Tuesday, July 24, 2012 2:49 pm

No matter where you live, the chances are good that a state or local government near you may be having some difficulty in balancing its budget. As a citizen, you’re probably concerned about how this situation will affect your life and your community. But as an investor, you may also wonder how this might affect any municipal bonds you own. Fortunately, the outlook might be brighter than you think.

Of course, taken to the extreme, the financial challenges of some state and local governments could conceivably affect their ability to fulfill the payment obligations on their municipal bonds. But investment-grade quality municipal bond default rates historically have been very low, especially when compared to those of corporate bonds. And municipalities are cutting spending, eliminating nonessential programs and, in some cases, raising taxes or fees. In short, they are taking steps that, while potentially painful to residents, are likely to help them continue making timely payments of interest and principal on their municipal bond obligations. Furthermore, municipalities must still fund various projects, and even one bond payment default could impact their future ability to borrow money in the form of new municipal bonds.

So are munis right for you? The answer depends on your situation — your goals, need for investment income, current investment mix, risk tolerance and so on. But if you want to receive interest payments that are exempt from federal taxes, you may well be interested in exploring municipal bonds. Keep in mind, though, that municipal bonds may be subject to state and local taxes and the alternative minimum tax (AMT).

In addition, you’ll want to be familiar with “taxable-equivalent yield.” Typically, municipal bonds pay an interest rate that’s lower than those paid by taxable bonds. Since this interest is free from federal taxes, however, the rate may not be as low as it appears. The taxable-equivalent yield measures the rate you’d have to earn on a taxable bond to match the income from a tax-exempt municipal bond. And the higher your tax bracket, the higher your taxable-equivalent yield.

Suppose that you’re in the 35 percent marginal tax bracket, and you are considering a tax-exempt municipal bond with a 3.33 percent yield. You simply divide 3.33 percent (0.0333 in decimal form) by 1 minus 0.35 (your tax bracket), which would give you 0.0512, or 5.12 percent. In this tax bracket, a muni with a 3.33 percent yield is equivalent to a taxable bond with a 5.12 percent yield (this example is for illustration purposes only).

Keep in mind that, before investing in bonds, you should understand the risks involved, including interest rate risk, credit risk and market risk. Bond investments are subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and you can lose principal value if the investment is sold prior to maturity. So it’s best to discuss municipal bonds with your financial and tax advisors.

By adding quality municipal bonds to your portfolio, you can show faith in your municipality, your investment dollars can help support worthwhile projects in your area, and you receive a steady source of tax-exempt income.

This article was written by Edward Jones for use by Ahwatukee Foothills Edward Jones Financial Advisor Kim DeVoss, CFP. Reach her at (480) 785-4751 or Kim.DeVoss@edwardjones.com.

More about

More about

More about

  • Discuss

Gov. Gary Johnson set to hold rally in Phoenix on October 1

PHOENIX - Gov. Gary Johnson is set to make an appearance in Phoenix this weekend. According to the Libertarian presidential candidate's websit…

Published: September 29, 2016 - 6:49 am @ http://www.abc15.com/news/region-phoenix-metro/cen…

2016 American Architecture Award Winners Announced

Save 2016 American Architecture Award Winners Announced 75 buildings have been announced as the winners of the 2016 American Architecture Awar…

Published: September 29, 2016 - 5:52 am @ http://www.archdaily.com/796136/2016-american-arch…

(2016/09/29) Giuliani says Clinton is “too stupid to be president,” WA mall shooter’s history of domestic violence and sexism, AL prison guards go on strike in solidarity with inmates

Episode #1535: CR needs your support! New dirty hobos will receive a combo pack of stickers (10 stickers!)  Download and review Jamie’s Love S…

Published: September 29, 2016 - 5:39 am @ http://wearecitizenradio.com/20160929-giuliani-say…

dcBlox Enters Secondary Data Center Markets With Modular Design

Six years ago, Chattanooga, Tennessee, became the first city in the US (and one of the first in the world) to offer gigabit-speed internet ser…

Published: September 29, 2016 - 5:40 am @ http://www.datacenterknowledge.com/archives/2016/0…

Cape Watch: Look Out for Doctor Strange in 'Avengers: Infinity War'

If you’ve been looking at the casts for Spider-Man: Homecoming and The Flash and thinking “Man, these superheroes just keep getting younger an…

Published: September 29, 2016 - 5:39 am @ https://www.wired.com/2016/09/cape-watch-105/

Police investigating man's death in Phoenix

PHOENIX - Police are investigating after a man was found dead inside a home in Phoenix. The scene near 10th Avenue and Buckeye Road was still …

Published: September 29, 2016 - 5:18 am @ http://www.abc15.com/news/region-phoenix-metro/cen…

How Russia Wants to Undermine the U.S. Election

The leaders of the U.S. government, including the President and his top national-security advisers, face an unprecedented dilemma. Since the s…

Published: September 29, 2016 - 5:09 am @ http://time.com/4512771/how-russia-wants-undermine…

Clinton Leads in Key Battlegrounds; Seen As Big Debate Winner

We came to PPP after a public poll in the San Jose Mayoral race showed our opponent ahead by 8 points. They found our candidate (Sam Liccardo)…

Published: September 29, 2016 - 4:39 am @ http://www.publicpolicypolling.com/main/2016/09/cl…

Six Things I Love About the Hacienda Del Sol Guest Ranch Resort

Shares 79I’ll admit it.  When it comes to hotels stays, I am particular.  I expect a hotel I am paying good money for to be immaculately clean…

Published: September 29, 2016 - 1:04 am @ http://acorkforkandpassport.com/hacienda-del-sol-g…

Arizona State Fair Food: 38 new deep-fried treats and desserts to try at this year's fair (Oct 7-30)

PHOENIX - Last year , the new food items to the Arizona State Fair were the deep-fried Red Velvet Cupcake and the Spaghetti Ice Cream. (We're …

Published: September 29, 2016 - 12:02 am @ http://www.abc15.com/entertainment/events/arizona-…

Facebook

ahwatukee.com on Facebook

Twitter

ahwatukee.com on Twitter

RSS

Subscribe to ahwatukee.com via RSS

RSS Feeds

Spacer4px

Most Popular

Online poll

Loading…