When you purchase a municipal bond, your interest payments will be free from federal taxes; if the municipality that issues the bond is in your state, your interest payments also may be exempt from state and local taxes. Keep in mind, though, that some municipal bonds might be subject to the alternative minimum tax.
In any case, municipal bonds also offer other benefits. When you buy a municipal bond, you’re typically helping support an important public works project.
Municipal bonds do have their own special place in the world of investment. You may just want to explore them further.
WHEN BUYING BONDS, QUALITY COUNTS
When you own bonds, you receive regular interest payments. So, naturally, you’d like these payments to be as large as they can possibly be. Should you “chase” higher interest rates?
If you do, you may sacrifice quality. Lower-quality bonds must offer higher rates to attract investors. But these bonds, by definition, carry a higher risk of default. And in today’s low-rate environment, there generally isn’t enough of a difference between the rates of low-quality and quality bonds to justify the increased risk.
To find good quality bonds, you should look for those considered “investment grade” by one of the major independent rating agencies, such as Moody’s or Standard & Poors.
There are places in your portfolio where a degree of intelligent risk can be valuable. But when it comes to investing in bonds, high risk doesn’t always payoff - so stick with quality.
Contact Wendell at Edward Jones www.edwardjones.com.
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