Q: What are your thoughts on municipal bonds?
A: First, I should explain municipal bonds. A municipal bond is a debt obligation issued by states, cities, counties and other governmental entities to raise money to build schools, highways, hospitals, etc.
As described by the Securities and Exchange Commission, when you purchase a municipal bond, you lend money to the “issuer,” the government entity that issued the bond. In exchange, the government entity promises to pay you a specified amount of interest, usually semiannually, and return your money, also known as “principal,” on a specified maturity date.
The reason investors like these securities is that the interest you receive is generally exempt from federal income tax. The interest may also be exempt from state and local taxes, if you live in the state where the bond is issued.
To learn more about investing in municipal bonds, visit the Investing in Bonds site.
So, having said all that, I like municipal bonds, and I own some myself. If you are looking for relative safety and a tax advantage, this type of bond can fit nicely in a well-diversified investment portfolio.