Municipal bonds 101

Q

Should I invest in municipal bonds? How do they work?

— A.L., Decatur, Illinois

A

Parking some money in municipal bonds can make sense for many investors.

Sometimes referred to as “munis,” municipal bonds are essentially loans in which state or local governments borrow money from investors, promising to repay it with interest. The money is typically used to pay for projects such as building or repairing schools or roads, or addressing transportation or housing needs.

Just as states and cities vary widely in their financial health, municipal bonds vary in their riskiness. While “general obligation” municipal bonds are backed by the issuer’s credit, “revenue bonds” can be riskier, as they depend on the project being funded to generate the needed revenue.

One advantage of municipal bonds vs. corporate bonds is that the interest they pay is usually exempt from federal taxation and often state taxation, as well. (Capital gains on municipal bonds are taxable, though.) Municipal-bond interest might trigger other taxes, such as Alternative Minimum Tax (AMT) or Social Security benefit taxation, and it could also increase your Medicare premiums. You might want to consult a financial adviser before investing a lot in municipal bonds.

The minimum investment in municipal bonds is often $5,000. Learn more about them at MunicipalBonds.com and InvestingInBonds. com.

Q

Where can I find the highest interest rates for certificates of deposit (CDs)?

— M.Y., Modesto

A

Go to our new site, TheAscent.com. It recently listed interest rates of 3% or higher for five-year CDs and 2.7% or higher for two-year CDs from a handful of financial institutions.

Remember that you’re not restricted to banks and credit unions near you; you can do business with online banks, or ones based far away.