Safety Characteristics of Municipal Bonds
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Safety Characteristics of Municipal Bonds
Municipal bonds are debt obligations issued by a state or its subdivisions. Investors buy them because of their tax-advantaged interest and the "security" offered by a state or municipality. Municipal bonds may be secured or unsecured.
Things To Know
- Many municipal bonds are insured by outside agencies.
- Secured bonds are backed by collateral.
What does it mean to be secured?
To be secured means to be backed by collateral, as revenue bonds are. To be unsecured is to be without collateral. Investors who choose unsecured bonds must trust the issuer’s creditworthiness. As mentioned before, general obligation bonds are of this type.
Many municipals, especially revenue bonds, have an interesting additional feature: they may be insured by outside agencies. These insurers guarantee that they will pay bondholders their interest and principal if the issuers default. Typically, the issuer—not the individual investor—purchases the insurance, and the coverage applies to the entire bond issue.
Who insures them?
Two well-known municipal bond insurers are Build America Mutual and Assured Guaranty. There are a few others. Large commercial banks sometimes guarantee bonds, too.
Insured bonds are rated higher than non-insured bonds. However, they pay lower interest rates.
