Bond: Bond is investing in an entity/asset for a fixed period of time and obtaining additional income through it, like interest. They are one of the perfect ways to increase time value of money. Time Value of Money: As and when the cost/ market value of a product increases the value of money decreases. But through investing money in the investment instruments the value of money of that actual period can be obtained as it raises interest as additional money, adding additional value to the actual investment.
And then I realized that when I was in my graduation, I overheard my college dean talking about …show more content…
And here is the answer I found to my question:
Risk Factors of Municipal Bonds:
Credit Risk: The borrower may become insolvent and might be unable to pay-back the principal and interest. At that point how can the bond holders be paid-back? Here comes the CRA’s (Credit Rating Agency). The CRA’s helps to evaluate the bond issuer’s capability so that the bond issuer will be liable to repay on behalf of the borrower, if the borrower becomes insolvent. These credit ratings help the bond holder to decide whether it’s a healthy investment or not. And this leads to mitigation of the risk factor and the rating is given based on the asset worth and insured worth of the issuer.
Interest Rate Risk: The interest rates in Municipal bonds are fixed for the entire term. If there is a raise in interest rates in the market, then, the amount received by the bond holders might be lower when compared to the other investments.
Call Risk: If the calls are fully made and the project was into profit’s, then the issuer will pay back the principal amount and with a bit of interest till date and terminates the deal with final payment, which might end up the investor to get an additional yield but not as much as expected because the bond is repaid before …show more content…
Where new investors may pay premium to the issuer to pay the old bond holder prior to the maturity, which provide additional investment to the issuer and higher yield to the new bond holders.
So in a nut shell, despite of all the risks, Municipal bonds are issued for the public purposes and in few cases are provided with tax exemptions as it is to help their own community to grow, and as said by Michael Jackson in his song with a motto “to make this world a better place for everyone to live