Municipal bonds are those issued by states, cities and public agencies. Many people looking for a conservative investment close to home choose municipals.
These are long-term, low-yield securitiestraded over the counter, incidentallyof interest primarily to the investor in the high tax brackets who is seeking non-taxable income.
The purposes of municipal bonds are familiar to every citizen. States issue bonds for highway construction, veterans' pensions, institutional building, and conservation programs, to name just a few. Cities and towns have a variety of local needs. The large city with an elaborate financial structure may need public housing, new buses or subways, or simply one bond issue to replace another.
The small town may be building a library, buying new fire trucks, or planning recreational facilities, including a swimming pool. The school district needs money for a new school. Assessments may have to be levied for pavements or sewers. Public authorities may be building toll bridges or highways. Water departments want to develop a watershed or install new mains. Power departments need a generating station, or the extension of their lines.
The kinds of bonds issued to accomplish these purposes vary with the borrowers' sources of income. Highest grade and lowest yield obligations are the "full faith and credit" bonds of agencies empowered to levy taxes. As long as the property owners, businesses, and various licensees can meet their levies, interest payment and amortization are assured.
Most of the purposes mentioned above would be met with this kind of security. Exceptions would be the toll bridges and highways, and transit and utilities systems, which would expect to pay back out of the income produced by the improvement and, hence, would issue "revenue bonds." Another exception would be the "assessment bonds" for sewers and such, which would be met by the direct charge to each beneficiary of the improvement.
Otherwise, the features of municipal bonds vary little from those of corporates. Most municipals are debentures, unsecured by property or other assets of the issuer. Some, however, may be backed by specific tax revenues or other monies. Sinking funds may be provided for by state and city borrowers.
Regular maturities are the rule, although serials, which may be retired in installments, are also favored. These days many issues are callable.
Where tax revenues support the bond, the quality of the issue naturally will depend on the stability of the tax structure. The long-range prospects of the community are not always easily determined, but bond analysts can provide a judgment on its past reliability, on the current condition of its "ratables" (the property eligible for taxation), the population trend, and the vigor of its business community.
Topping the bond list for any investor should be United States Government bonds, particularly the Series E and H savings bonds. This statement can be made without qualification. Every expert in the field will tell you the same thing. The E and H bonds are backed by the tremendous resources of the Government and are absolutely guaranteed against dollar loss. They do not fluctuate with interest rates or business conditions. The possibility of default is so remote as to be out of the question.
All in all, bonds are a safe and important addition to any healthy and balanced portfolio. It is up to the individual investor what kinds of bonds he wishes to purchase.