Today on the Finance Flash Go! podcast, we are going local and organic as we discuss municipal bonds!
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What are municipal bonds?
A municipal bond is a bond (or “debt” or “IOU”) issued by a state or municipality to fund public works. Like other bonds, investors lend money to the issuer for a predetermined period of time, also known as the maturity of the bond. The issuer promises to pay the investor interest over the term of the bond (usually twice a year), and then return the principal back to the investor when the bond matures – that’s how all bonds work. The only difference is a municipal bond is lended locally to a municipality rather than the state or federal government.
Municipal bonds are considered quite safe with a low default rate and are very tax efficient as their interest is tax free. This is in contrast to most bonds that are tax inefficient.
Therefore, municipal bonds are good to hold in a taxable account while other bonds should usually be held in a tax advantaged account.
You can also of course by index funds of municipal bonds.
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