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A municipal bond, commonly known as a muni, is a bond issued by state or local governments, or entities they create such as authorities and special districts. In the United States, interest income received by holders of municipal bonds is often, but not always, exempt from federal and state income taxation.
Perhaps the most significant advantage of municipal bonds or “munis” is the tax-free interest they generate. ... munis are subject to interest rate risk. If interest rates rise, the value of ...
An auction rate security (ARS) typically refers to a debt instrument (corporate or municipal bonds) with a long-term nominal maturity for which the interest rate is regularly reset through a Dutch auction. Since February 2008, most such auctions have failed, and the auction market has been largely frozen.
In general, municipal bonds come with a low risk of default and have less volatility than riskier corporate bonds or stocks. While you can invest in individual municipal bonds, it’s easier to ...
A risk-free bond is a theoretical bond that repays interest and principal with absolute certainty. The rate of return would be the risk-free interest rate. It is primary security, which pays off 1 unit no matter state of economy is realized at time +. So its payoff is the same regardless of what state occurs.
Municipal bonds generally carry less risk than stocks and are tax-exempt, which for higher tax-bracket investors effectively increases the return rate. It’s crucial to highlight though, that ...
The bet in municipal bond arbitrage is that, over a longer period of time, two similar instruments--municipal bonds and interest rate swaps--will correlate with each other; they are both very high quality credits, have the same maturity and are denominated in U.S. dollars. Credit risk and duration risk are largely eliminated in this strategy.
Municipal bonds may also be a good fit for your portfolio if you are looking for bonds with a low risk of default or want to avoid the potential volatility associated with corporate bonds or stocks.
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