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.
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 (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
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
Generally, all the individual bonds in a GO bond issue
have the same maturity date.
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:
- Industrial Revenue Bonds
- Project Notes
- New Housing Authority Bonds
- Special Tax Bonds
- Double-Barreled Bonds
- Anticipation Notes
Contact a LPL Financial
Consultant to go over your options for Corporate
or Municipal Bonds.
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