Content
- What Are Municipal Bonds?
- An Investment For Today's Tax-conscious Investor
- The Advantages of Tax Exemption
- Understanding Yields
- How Safe Are Municipal Bonds?
- Understanding Market Risk
- Understanding Calls
- Gains and Losses
- Bonds With Special Investment Features
- Types of Tax-exempt Municipal Bonds
- 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
- Glossary
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All information and opinions contained in this publication were produced by The Bond Market Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, The Bond Market Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.
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Understanding Market Risk
While the interest payment, also known as the coupon rate, cannot be changed during the life of a bond (unless, of course, it is a variable-rate security), the market price of a security changes 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 their original price. Consequently it is important to understand how the direction of interest rates might affect the value of your holdings. As with other fixed-income securities, municipal bond prices fluctuate in response to changing interest rates: Prices increase when interest rates decline, and prices decline when 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.
- 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.
