Question

Discuss the pros and cons of tax-backed and revenue municipal bonds and the advantages and disadvantages of including them in a portfolio.

Answer 1

Tax Backed and Revenue Muncipal Bonds Municipal bonds are debt instruments issued by city and local governments. They are normally used to raise money for capital investment in local projects such as schools, streets and highways, bridges, hospitals, public housing, and utilities. Municipal bonds bear interest which is paid at either a fixed or variable rate, depending on the terms of the bond. Revenue Municipal Bonds                                   repay from a specified future stream of income, such as a utility or payments from customers or tenants. Advantages: 1 Free from Federal Taxes This tax refuge offers liquidity and tax efficiency all in one. 2 Free from State and Local Taxes Investments in local municipal development projects are exempted from state and local taxes in addition to federal taxes 3 Lower Volatility Than Stocks (Fixed Income Assets) Much better return on invested capital than either FDIC insured accounts or Treasuries and safe than stock market. 4 High Level of Liquidity Municipal bonds are highly liquid and are traded on a secondary market. This means that if you are strapped for cash or need an influx of money for an investment opportunity or emergency, the capital can be accessed quickly. Disadvantages: 1 Bond Yields May Not Beat Inflation If you’re not investing in municipal bonds for current income, but instead for long-term tax-advantaged growth, you’ll want to consider how your bond investment will hold up to inflation. Because municipal bonds are often a conservative investment and they also offer tax advantages, their yields tend to be relatively low. Therefore, they are less likely to beat inflation than many other investments, such as stocks. This means the money you have parked in a bond fund could be worth less in buying power a few years from now than it is today. 2 Opportunity Cost calculate your taxable equivalent yield for comparison to other bonds. 3 Risk of Default and Loss of Capital. Any investment carries risk. Municipal bonds are no different. Although historically, it’s been rare, there’s always the chance the municipality could go belly up, in which case your interest payments and principal would be lost. Based on above discussion and your finacial strategy and goal Analyse pros and cons of Tax backed and Revenue Muncipal Bonds.