Covered Bonds
February 12, 2025
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We already know that bonds are issued by a wide variety of entities. Bonds are routinely issued by corporations, banks, and even governments all over the world. A special category of bonds called municipal bonds (munis) are issued by various local governments across the globe. These bonds are often categorized separately because they have certain special characteristics. In this article, we will have a closer look at what municipal bonds are as well as the pros and cons of investing in such bonds.
Municipal bonds are IOUs that are commonly issued by local governments. Hence, when investors invest in municipal bonds, they are ideally giving money to local governments to build projects. It is common for municipalities to issue bonds to finance projects such as roadways, railways, and even canals. The market for municipal bonds is fairly large. It has been valued at close to $4 trillion. However, it is important to realize that the number of issuers in municipal bond markets is much large. Hence, there are a lot of issuers that increase the variety in the municipal bond market.
There are several types of municipal bonds. However, most investors segregate these bonds into two main categories based on the guarantee that the municipal government is providing. The categorization of municipal bonds has been mentioned below:
A large number of municipal bonds are already in circulation. Also, a very large number of bonds is issued every year. This is because of the large investor appetite for such bonds. This appetite is the result of several distinct advantages that such bonds provide. Details about the advantages of municipal bonds have been explained below:
There are certain disadvantages of investing in municipal bonds as well. These disadvantages have been listed below:
The bottom line is that municipal bonds are safe. However, they provide a very low yield. They are largely used by investors in higher tax brackets who end up getting a better yield because of the tax advantages.
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