Corporate and Municipal Bonds

Bonds are loans that investors make to corporations and governments. The borrowers get the cash they need while the lenders earn interest. Every bond has a fixed maturity date when the bond expires and the loan must be paid back in full, at par value. The interest a bond pays is also set when the bond is issued. The rate is competitive, which means the bond pays interest comparable to what investors can earn elsewhere. As a result, the rate on a new bond is similar to current interest rates, including mortgage rates.

Corporate Bonds
Are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business.

When you buy a corporate bond, you lend money to the "issuer," the company that issued the bond. In exchange, the company promises to return your money, also known as "principal," on a specified maturity date. Until that date, the corporation usually pays you a stated rate of interest, generally semiannually. While a corporate bond gives you an IOU from the company, you do not have an ownership interest in the issuing corporation, unlike when you purchase the company’s stock.

Municipal Bonds
Municipal bonds (nicknamed munis) are bonds issued by states, cities, counties and various districts to raise money to finance operations or to pay for projects. The projects they finance include hospitals, schools, power plants, office building, and airports.

Individual investors purchase the majority of municipal bonds. These bonds are usually issued in $5,000 face-value denominations or multiples of $5,000. They mature in anywhere from one to fifty years. Like other bonds, they may also be bought at a discount. For example, an investor may buy a $5,000 bond for only $4,000. At maturity, he or she will receive the original $5,000.

Municipals are considered relatively safe from default despite some adverse notoriety in past years. After they have been issued, they can be sold to other investors on the secondary market through exchanges or on the over-the-counter market.

The value of Municipals is subject to market fluctuation and it may be worth less than original cost upon redemption.

Types of Municipal Bonds:

General Obligation Bonds
(GO bonds) are unsecured municipal bonds that finance municipal operations. They have maturities of 10 years or more. The creditworthiness of the issuing city or state is the only "guarantee" they provide. GO bonds finance projects that do not produce revenue.

The municipal issuer repays the bonds with funds raised by fees or property sales. If the issuer is unable to pay, it may turn to taxation to guarantee interest and principal payments.

Generally, all the individual bonds in a GO bond issue have the same maturity date.

Revenue Bonds
The revenues generated by the projects they fund secure revenue bonds. Such revenues include tolls, fees and lease payments. For example, a city may issue revenue bonds to pay for a new stadium. It will pay bondholders their interest and principal from the stadium’s revenues. Default will occur if revenues are not high enough to pay bondholders. In this case, payments to bondholders will be deferred. Endowments donated by companies or individuals who want to help finance a particular project partially secure some revenue bonds.

Revenue bonds involve higher risk than GO bonds because of the possibility that the projects financed may not bring in enough revenue to pay bondholders. However, these bonds also pay higher yields. Their maturities are usually serial. This means that individual bonds of one whole issue mature on different dates.

Types of Revenue Bonds:

Contact a LPL Financial Consultant to go over your options for Corporate or Municipal Bonds.

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