Content
- What Are Municipal Bonds?
- An Investment For Today's Tax-conscious Investor
- How Safe Are Municipal Bonds?
- The Advantages of Tax Exemption
- Understanding Yields
- Understanding Market Risk
- Understanding Calls
- Gains and Losses
- Types of Tax-exempt Municipal Bonds
- Bonds With Special Investment Features
- Taxable Municipal Bonds
- Other Basic Facts
- The Tax-exempt Municipal Bond Market-How Big and Who Buys?
- Tax-exempt/Taxable Yield Equivalents
- State Taxation of Municipal Bonds for Individuals
- State Taxation of Municipal Bonds for Corporations
- Glossary
All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association (SIFMA) from our membership and other sources believed by SIFMA to be accurate and reliable. By providing this general information, SIFMA is neither recommending investing in securities, nor providing investment advice for any investor. Due to rapidly changing market conditions and the complexity of investment decisions, please consult your investment advisor regarding investment decisions.
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- Bond Basics
- Understanding Market Risk
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Understanding Market Risk
Whether a bond pays the investor a fixed interest rate (also known as the coupon rate), which cannot be changed during the life of a bond, or a variable interest rate, the market price of a municipal bond will vary as market conditions change. If you sell your municipal bonds prior to maturity, you will receive the current market price, which may be more or less than the original price depending on prevailing interest rates at the time of sale. So, for example, a municipal bond issued with a 5.0% coupon will sell at a premium if interest rates at the time of sale are below 5.0%. Consequently, it is important to understand that municipal bond prices fluctuate in response to changing interest rates: prices increase when interest rates decline, and prices decline when 6 interest rates rise.
It’s easy to understand the reasons:
- when interest rates fall, new issues come to market with lower yields than older securities, making the older securities worth more, hence the increase in price; and
- when interest rates rise, new issues come to market with higher yields than older securities, making the older ones worth less; hence the decline in price.
