Municipal Bond Rates Are Not Important

Municipal Bond Rates Are Not Important

by Avery Putnam

Many bond investors looking for great bonds to buy look at the bond interest rates. Municipal bonds are no exception. People looking to invest in municipal bonds usually consider municipal bond rates first. However, most of the time municipal bond rates are not as important as one might think. There are many other factors that are far more important and should be considered before considering municipal bond rates.

The term municipal bond rates refer to the coupon rates of municipal bonds. Coupon rates or interest rates are fixed rates set at the time of the municipal bond offerings. The issuer and their underwriters set the municipal bond rates to reflect the financial needs of the issuer and take into account many factors such as the market condition for municipal bonds. Although municipal bond rates are published in financial papers, it is best to look at other factors when investing in municipal bonds.

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.

Since the municipal bond rates do not change with bond characteristics, investors need other ways to compare municipal bonds. Most advanced municipal bond investors calculate the bond yield. The higher the bond yield the better the investment. Unlike municipal bond rates, municipal bond yields take into account other factors that are important when considering bonds as investments such as the prices of the bonds and the time to maturity.

There is more than one type of yield for municipal bonds. Different types of yields can be used to compare municipal bonds. While municipal bond rates cannot be used to compare municipal bonds, municipal bond yields can. Sometimes, municipal bonds with higher rates have also higher yields but not always. The price of the bond as well as time to maturity are can be very important factors to consider.

Municipal bonds can be purchased at par, lower than par or higher than par. The price you pay for the municipal bonds highly influence how good of an investment the municipal bonds are. The municipal bond rates should play a minor role in deciding whether to invest in a municipal bond. For example, a $10 investment that pays you $1 for 5 days and also $10 at the end is obviously better than a $30 investment that pays you $1 for 5 days and only $10 in at the end.

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.

About the Author:

Municipal bonds have constantly been the standard way of investing of the ultra-wealthy on the planet for over half a century. To learn more about Municipal Bond Rates, click over to Investing Tax Free today.

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