Municipal Bond Returns

A Municipal Bond is a fixed interest rate bonds. The price of these bonds rises and falls in relation to the interest rate available in the market. If the rate rises and exceeds your bond, the value will drop. If the rate falls, and your bond’s rate is higher, the will become more valuable. This only matters if you want to sell your bond in the secondary market. If you are holding until maturity, this is meaningless.

Some municipal bonds are callable. If the municipal bond is callable, the bond is exposed to interest rate related call risk. When the interest rate falls, bonds substantially above new interest rates acquirable stand a higher chance to be called. If possible, invest in non-callable municipal bonds.

Fortunately, municipal bonds are disconnected from most share markets, and are not easily affected by market downturns. When shares crash, cities are not likely to follow unless the taxable revenue of their city dwellers crashes, or the revenues generated by projects financed by their bonds collapse. This does not mean municipal bond issuers are immune from economic recessions. You should not consider them invulnerable to failures or bankruptcies.