Municipal bond rates are not important when deciding what municipal bonds to invest in. However, most people, especially new municipal bond investors look at the municipal bond rates before anything else and invest in the bonds with the highest rates. While sometimes municipal bonds with highest interest rates are the best investments, it is not always the case. After all municipal bond rates do not take into account the prices of the bonds and the maturity dates.
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.
It should be common sense that when a bond carries higher risk, investors should be paid more for buying it. For example, when a bond has a long shelf life or maturity date such as 10 years, the investor should be paid more for buying that bond than buying a bond that only has a shelf life of 1 year. However, municipal bond rates do not always change with maturities. Municipal bonds that mature in 10 years time can have the same municipal bond rates as bonds that mature in just one year.
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 are many types of yields that can help investors decide which municipal bonds to buy. The municipal bond rates are use when calculating municipal bond yields. Usually, the higher the municipal bond rates, the higher the yield, but not always. The price of the bond as well as the time to maturity play important roles in calculating the yield.
The price of a municipal bond can make the bond less attractive even when the interest rate is high. Municipal bonds can be bought at par, at premium or at a discount price. If an investor is paying more for the bond, buying it at premium, the investor should be compensated with high enough interest rates so that in the end the investor comes out ahead. For example, a $100 investment that pays you $1 for 10 days and also $100 at the end is better than a $30 investment that pays you $1 for 10 days and only $10 in at the end. For an investor to invest $30, the bond needs to pay more than $1 a day or pay for longer than 10 days. This shows that considering municipal bond rates alone is not adequate.
When a bond has a longer life or longer time to maturity, the investor should be paid more. Municipal bond interest rates should increase when the time to maturity increases. This is because anything can happen during the time to maturity. The market interest rates could increase making an investor's municipal bond investment not worth while. The issuer could be in trouble or the project that the bond is based on could be halted. There are many reasons why investors need to be compensated more for longer life of the bond. However, this is not always the case.
Since there are many factors that you should consider when investing in municipal bonds, looking at the municipal bond rates alone is not enough to find out if they are good investments or not. Municipal bonds with very low rates can still be a good investment if everything else fall into place such as if the price is extraordinarily low or the time to maturity is short enough so that the yield skyrockets.
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Municipal bonds have almost always been a favorite way of investing for the very richest people on the planet for over half a century. If you'd like to learn more about Municipal Bond Rates, click over to Investing Tax Free today.
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