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Municipal Bond Risks

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With any investment in municipal bonds comes a variety of risks. It is important to understand that even though they are second in safety only to U.S. Treasury obligation, municipal bond market prices, like all fixed income securities, fluctuate in response to changing interest rates. Prices increase when interest rates decline, and prices decline when interest rates rise.

  • When interest rates fall, new issues come to market with lower yields than older or outstanding bond issues, which makes outstanding bonds worth more.

  • When interest rates rise, new issues come to market with higher yields than older or outstanding bond issues, which makes outstanding bonds worth less.

Whether a bond pays the investor a fixed interest rate (also known as a coupon rate), or a variable interest rate, the market price of a municipal bond will vary as market conditions change. If you sell your municipal bond prior to maturity, you will receive the current market price, which may be more or less than the original price depending on interest rates at the time of sale.

For example, a municipal bond that is issued with a 5.0% coupon or interest rate will sell at a premium, or above par, when at the time of sale new issue interest rates are below 5.0%.

If you’re ready to invest in municipal bonds & their risks, put a municipal bond specialist to work for you. GMS bond specialists can help you assess market risk to ensure that you are making the wisest financial investment possible. Purchase or sell bonds or contact us today for more information. You can also call 877-467-0070.