Forget about Municipal Bond Rates

Many bond investors looking for great bonds to buy look at the bond interest rates. Municipal bonds are no exception. People looking to invest in municipal bonds usually consider municipal bond rates first. However, most of the time municipal bond rates are not as important as one might think. There are many other factors that are far more important and should be considered before considering municipal bond rates.

Municipal bond rates are coupon rates of the municipal bond. They are the rates that the issuer set at the time of the issue how much they will pay investors for the money borrowed. When a municipal bond issuer issues a bond, the issuer works with the underwriters to come up with the appropriate interest rates, the municipal bond rates, to satisfy the issuer's financial needs taking into account the market demand and supply. The municipal bond rates stay the same throughout the life of the bond.

Municipal bond rates do not always change to reflect the risk associated with the bonds. Different bonds have different characteristics such as maturity dates, interest rates as well as prices. It is common sense to assume that municipal bonds with higher risks should have higher interest rates but this is no always the case. There are plenty of municipal bonds that have different characteristics such as longer maturity dates and higher prices that have the same interest rates.

While the municipal bond rates may stay the same for all maturity dates, the yield of the municipal bond should be different. This is why advanced municipal bond investors look at municipal bond yield more than their interest rates. The yield calculation takes into account factors such as the maturity date and price, unlike the coupon rates.

There is more than one type of yield for municipal bonds. Different types of yields can be used to compare municipal bonds. While municipal bond rates cannot be used to compare municipal bonds, municipal bond yields can. Sometimes, municipal bonds with higher rates have also higher yields but not always. The price of the bond as well as time to maturity are can be very important factors to consider.

Municipal bonds can be sold or bought at premium, at par or at discount. It is no good buying municipal bonds with very high interest rates if you have to pay a lot for them. For example, which is better, a $10 investment that pays you $1 for 10 days and also $10 at the end or a $30 investment that pays you $1 for 10 days and only $10 in at the end? Of course the first because you invested $10 and get $20 back whereas in the latter case, you invest $30 and only get $20 back which means you just lost $10 in that investment.

The time to maturity is also important when figuring out if a particular municipal bond is a good investment. For example, if you have to wait five years to get your $10 investment back, it is riskier than if you had to wait only 1 year. After all anything could change in five years. What is a good investment today may not be in five years time and you would have locked in your money in a bad investment. Good municipal bond rates today may not be good in a years time.

In conclusion, higher municipal bond rates do not always mean better investments. It is better to consider the bond yield rather than its coupon or interest rates. This is especially true when an investor is investing long term. Higher yield is needed to compensate the investor for taking on more risk.

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