Should businesses invest in municipal bonds?

Investing in any type of bond or stock must take careful consideration and planning. Making investments for your company should be done in much the same manner. Municipal bonds are one way for companies to invest and make a profitable return if they understand what they are investing in. Should businesses invest in municipal bonds? Let's take a closer look at what they are, risk factors, and strategies to make a more educated decision on business investing with municipal bonds.

Know your objectives
If you are thinking of investing in municipal bonds you need to first consider what your primary objectives are. When you invest in municipal bonds your primary objective should be to preserve your capital while at the same time generating a tax free income stream. When you buy a municipal bond you are basically loaning money to the issuer in exchange for a set number of interest payments. Those interest payments will be set for a predetermined period of time. When the municipal bond reaches its maturity date at the end of that predetermined period, you will receive the full amount of your original investment back.

Types of Municipal Bonds
There are basically two different types of municipal bonds to invest in:


• General obligation bonds


•  Revenue bonds

General Obligation bonds
A general obligation bond is issued to raise immediate capital to cover certain expenses. They are supported by the taxing power of whoever has issued the bond. A general obligation bond is secured by a state or local government's pledge to use legally available resources to repay bond holders. The two types of government obligation pledges are limited tax general obligation pledge, and an unlimited tax general obligation pledge. The first requires a local government to levy a property tax sufficient to meet its debt service obligations. The second is identical to a limited tax pledge with the exception that the local government is required to levy a rate at whatever level is necessary to recover a shortfall from taxpayer delinquencies.

Revenue bonds
Revenue bonds are issued to fund infrastructure projects. Revenue bonds are a unique municipal bond because it guarantee of repayment comes solely form revenues generated by a specific revenue generating project that's associated with the purpose of the bond. Only the revenues specified in the legal contract between the bond holder and the bond issuer are required for repayment of the principal and interest of the bonds. Revenue bonds can carry a higher interest rate than general obligation bonds but are considered to be the second most secure type of municipal bond.

Risk Factors
While buying municipal bonds is usually considered a conservative investment strategy, they do have risks.


• Credit risk is an issue if the issuer cannot meet the financial obligations.


•  Interest rate risk. Interest rates for municipal bonds is fixed and doesn't change over the life of the bond. However, if the interest rates in the marketplace rise your bond will be paying a lower yield.


•  Call Risk. While you receive your entire investment back with municipal bonds, there is always the risk of the issuer calling the bond before it matures and you not receiving all that you expected.

Understanding how municipal bonds operate gives you the best advantage to investing your business in them. While they are the second most secure type of bond on the market today, they can prove to be risky in certain areas and becoming educated is important.