Municipal Bond Fund Performance
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Municipal Bond Fund Performance
As with all other mutual funds, there are factors that affect the performance of municipal bond funds. Usually the longer the maturity of the bonds in the fund, the higher their nominal interest rates—their coupon rates—will be. Municipal bonds typically mature in twenty or thirty years.
Things To Know
- The credit risk of an issuer affects the coupon rate on its bonds.
About credit risk and interest rates
The credit risk of an issuer also affects the coupon rate on its bonds. When an issuer has a low credit rating, it raises its interest rates to attract investors. There are mutual funds on the market that specialize in such high-yield bonds.
Overall, municipal bond interest rates tend to be lower than those of corporate bonds. Municipalities can offer investors lower rates than corporate bonds because municipal bonds are tax-free. As a result, municipal bond funds pay lower dividends than corporate bond funds do.
About the returns
When interest rates change, so does the market price of outstanding bonds. When interest rates rise, bond prices fall and vice versa. Fund managers who sell bonds to buy better ones pass on capital gains made on those sales to fund investors as capital gains dividends. These capital gains dividends are fully taxable.
The yield and risk of the bonds themselves and the way the secondary market value of bonds fluctuates with changing interest rates will affect the returns you can expect from your municipal bond fund.