Don't Worry about Municipal Bond Rates
Author: AveryPutnam Total views: 14 Word Count: 624
Municipal bond rates are not important when deciding what municipal bonds to invest in. However, most people, especially new municipal bond investors look at the municipal bond rates before anything else and invest in the bonds with the highest rates. While sometimes municipal bonds with highest interest rates are the best investments, it is not always the case. After all municipal bond rates do not take into account the prices of the bonds and the maturity dates.
Municipal bond rates are coupon rates of the municipal bond. They are the rates that the issuer set at the time of the issue how much they will pay investors for the money borrowed. When a municipal bond issuer issues a bond, the issuer works with the underwriters to come up with the appropriate interest rates, the municipal bond rates, to satisfy the issuer's financial needs taking into account the market demand and supply. The municipal bond rates stay the same throughout the life of the bond.
A bond can have many different characteristics from other bonds. Different characteristics lead to different risk level and rate of return. When a bond carries higher risk, the investor expects to be paid more for buying that bond. For example, a municipal bond that matures in 10 years time should have higher interest rates than a municipal bond that matures in 1 year because money tied up for 10 years is riskier. However, usually municipal bond rates do not correlate with length of time to maturity.
When considering what bonds to buy, it is not adequate to consider just the municipal bond rates. In fact, some investors do not look at municipal bond rates at all. These investors prefer to consider the yields of municipal bonds because the yield takes into account many other important factors such as time to maturity and price of the bond.
There is not just one type of yield to calculate, there are a few. While municipal bond rates are published and states without dispute, municipal bond yields can be calculated in different ways. However in all yield calculations, the municipal bond rates are used but they are then lowered by the prices that investors have to pay for the bonds as well as the time they have to wait to be repaid.
Municipal bonds can be purchased at par, lower than par or higher than par. The price you pay for the municipal bonds highly influence how good of an investment the municipal bonds are. The municipal bond rates should play a minor role in deciding whether to invest in a municipal bond. For example, a $10 investment that pays you $1 for 5 days and also $10 at the end is obviously better than a $30 investment that pays you $1 for 5 days and only $10 in at the end.
Also, the longer the time to maturity, the higher the municipal bond rates should be. For example, consider the following investments. For a $10 investment you will get your money back plus $1 a day for the 5 years or for the same investment you will get $1 a day for the next 10 days. In the latter case, you know you will get your money back soon plus $10 more whereas in 5 years time things could have changed tremendously. There may be other better investments such as $2 a day interest which you cannot participate in because you already lock in your money.
Because so many things could change over time, the municipal bond rates alone cannot judge how good the bonds are. You need to look at other factors such as the yields, the price of the bond as well as the issuer. Even municipal bonds can be risky and not worth investing sometimes.
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Municipal bonds have almost always been the standard investment vehicle of the ultra-wealthy worldwide for over half a century. If you'd like to learn more about Municipal Bond Rates, click over to Investing Tax Free today.
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