Assessing the Risk of a Municipal Bond
September 2, 2015 by admin
Filed under Finance & Loans
Municipal bonds offer a huge financial incentive to investors willing to pour money into their cities and states, but these bonds carry risk the same as any other loan. If investors want to profit from these loans, they need to assess the risk properly. Fortunately, there are a variety of ways to do so outside of talking to a financial advisor.
Each bond comes with an agreement for repayment that is dependent on the type of bond it is.
General obligation bonds are widely considered the lowest risk bonds, and their repayment structure is based on good faith and credit from the borrower. Somewhat riskier are revenue bonds, which promise repayment based on future sources of income. If those projects don’t work out, or are never completed, that money is lost.
Assessment bonds also offer moderate risk because they are based on the values of properties located within the area, but those boundaries and tax rates can change.
Before an issuer can borrow, it needs to receive a credit rating. That requires an independent agency to rate that borrower. Currently, there are three agencies that do so in the United States:
- Standard and Poor’s – A division of McGraw Hill Financial, which publishes research on stocks and bonds.
- Moody’s – the bond/credit rating arm of Moody’s Corporation, which provides international investment services.
- Fitch – With headquarters in New York and London, Fitch Ratings is considered one of the “Big Three” agencies in the space.
Traditionally, these bonds have extremely low rates of default because governments have the power to tax, and because of revenue from utility companies.
Phineas Upham is an investor from NYC and SF. You may contact Phin on his Phineas Upham website or LinkedIn page.
Comments