Municipal Bonds


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While some people might have the perception that municipal bonds are for investors who are in or near retirement, many investors who are still in their “working years” are now considering municipal bonds as an appropriate wealth preservation tool.

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Municipal Bonds

  1. 1. Municipal Bonds Provided by Larry J. Shaw, UBS Financial Services Inc. This article has been written and provided by UBS Financial Services Inc. for use by its Financial Advisors. While some people might have the perception that municipal bonds are for investors who are in or near retirement, many investors who are still in their “working years” are now considering municipal bonds as an appropriate wealth preservation tool. Tax-exempt municipal bonds have become one of the most popular types of investments. They offer an array of benefits, including:  Predictability. Bond buyers know how much they will earn, and how long it will be before their principal is returned. Interest is paid semi-annually, and bondholders receive their principal intact, when the bonds mature.  Relative Safety. Investment grade municipal bonds have an excellent history of creditworthiness.  Tax Free Interest. The interest earned on most municipal bonds is exempt from Federal income taxes, and may be exempt from state taxes in the issuer’s state, as well.  Liquidity. Should the need arise, an investor can generally sell almost any investment grade municipal bond quickly.  Variety. With over 1.5 million municipal bonds outstanding, investors are usually able to find the maturity and credit quality that matches their investment objectives.  Reduced Portfolio Volatility. Adding municipal bonds to a portfolio of all equities may improve overall portfolio stability. Understanding Market Risk Tax-exempt municipal bonds offer you the chance to maximize your after-tax return consistent with the amount of risk you’re willing to accept. As with other fixed-income securities, municipal bond prices fluctuate in response to changing interest rates: prices
  2. 2. increase when interest rates decline, and prices decline when interest rates rise. It is easy to understand the reasons:  When interest rates fall, new issues come to market with lower yields than older securities, making the older securities worth more; hence the increase in price.  When interest rates rise, new issues come to market with higher yields than older securities, making the older ones worth less; hence the decline in price. Bonds held to maturity are redeemed by the issuer at their face value—regardless of prevailing interest rates. Investors who sell a municipal bond before maturity may find themselves with a capital gain or loss. Although income generated by most municipal bonds is exempt from taxes, any capital gains earned from the sale of these bonds are subject to taxation. (If you are subject to the alternative minimum tax (AMT), income from certain “private purpose” municipal securities is included when calculating the tax.) Should investors move into bonds now? The answer—like all investment decisions— depends mostly on each individual’s situation. For the investor whose objectives include the preservation of principal or reliable cash flow, bonds should be a consideration regardless of market conditions. Let your investment objectives determine whether or not you buy bonds in the first place and let the market conditions influence which bonds you buy. The Best Time to Buy Bonds Might Be Before You Need Bonds For those investors who are living off their investments, or are getting close to doing so, the need to sell stocks to fund living expenses when the market is down can be costly. An investment portfolio of bonds and equities may provide reliable cash flow (from the bond portion of the portfolio), regardless of the behavior of the equity markets. This explains the popular appeal of a balanced portfolio. How much should an investor allocate to bonds? The answer will be a function of the individual’s needs and objectives. Several factors should be taken into account including the investor’s risk tolerance, time horizon and need for liquidity. Additionally, investors
  3. 3. should consider their goals, which might encompass after-tax return objectives, tax management or other unique circumstances. Whether you are searching for tax-advantaged income, trying to safeguard your principal, saving for college or targeting other financial objectives, consult with your financial advisor to determine if investing in municipal bonds could help you pursue your goal. As a firm providing wealth management services to clients in the U.S., we offer both investment advisory programs and brokerage accounts. Advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. For more information, please visit our website at <<>> The information contained herein is based on sources believed to be reliable, but its accuracy is not guaranteed. UBS Financial Services Inc. does not provide tax, legal or accounting advice. Please contact your tax advisor regarding the suitability of tax-exempt investments in your portfolio and your accounting advisor to determine the appropriate accounting treatment. Income from municipal bonds may be subject to state and local taxes as well as the Alternative Minimum Tax. Call features may exist that can impact yield. If sold prior to maturity, investments in municipal securities are subject to gains/losses based on the level of interest rates, market conditions and credit quality of the issuer. # # #