Understanding Municipal Bonds

0:00Understanding municipal bonds. This is a money minute from InCharge Education Foundation and MilitaryMoney.com. A municipal bond is a bond that is issued by a state or local government or one of the related agencies to help finance public projects such as the building and operation of public schools, sewage plants, and power plants. In return for the use of your capital, the borrower pays you a modest interest rate. On their own municipal bonds have very low returns, usually only up to 4 or 5 percent, even for the really good ones. However, the important thing to realize about municipal bonds is that their growth is generally exempt from federal income taxes, and usually from state taxes also if the bonds are issued in your home state. That means that a tax exempt municipal bond with a 4 percent return is equivalent to a taxable investment with as much as a 6.2 percent return, depending on your tax bracket. While it is possible for municipal bonds to lose value, this is extremely rare, and they've proven to be relatively safe investments. This money minute is made possible by InCharge debt solutions. Visit us online at www.incharge.org