Munis Offer Alternative To Government Debt

Scared of buying corporate bonds? Not interested in federal government debt? Maybe it’s time to give the local government a try.

Municipal bonds, often referred to as “munis,” are issued by government entities at the state or local level. Munis have been used to finance construction of projects such as highways, schools and hospitals.

Photo by eddie.welker, courtesy of flickr

They have also been used to pay for stadiums like Nationals Stadium in Washington DC (pictured at left) and the new Yankee Stadium in New York.

When looking at municipal bond rates, you will most likely see rates lower than corporate bonds.

However, much like corporate issues, municipal bond issues have varying levels of risk and return.

The rate offered by a muni depends upon the creditworthiness of the issuer. To find your state’s credit ratings, visit stateline.org.

Muni rates are also lower since the interest is often tax exempt at the federal level. Some munis are exempt at state and local levels, too. When comparing munis to corporate bonds, be sure to use the after-tax yield.

Munis are issued by government entities, but they have no ties to the federal government. Therefore, if a city defaults on a municipal bond issue, bondholders can not go to the U.S. Treasury and demand payment. 

For more information on municipal bonds, read The Basics of Municipal Bonds from Investopedia.