Page 35 - Flathead Beacon // 5.28.14

FLATHEADBEACON.COM BUSINESS MONTHLY MAY 28, 2014 | 35

FINANCIAL CORNER Jesse Rigler
SEASONS CHANGE.

Watch for Diferent Risk
LET US GET YOU WHERE
Levels of ‘Muni’ Bonds
YOU WANT TO GO!
A
RE YOU THINKING OF • Revenue bonds — Revenue bonds,
investing in municipal bonds? which inance schools, hospitals, utili-

If so, you may have good rea- ties, airports, afordable housing and
son, particularly if you are in one of the other public works, are paid by dedi-
higher tax brackets. After all, municipal cated streams of revenue. For example,
AN AMAZING
bond interest payments typically are revenues generated by the sewer system
SELECTION exempt from federal income taxes, and pay the interest on a sewer system rev-
possibly state and local income taxes, enue bond. Because revenue bonds have
OF TRUCKS, too — although some “munis” are sub- more restricted revenue streams than

4X4S AND ject to the alternative minimum tax. general obligation bonds, they are gen-
CARS
However, since not all municipal bonds erally viewed to be riskier. To compen-
are the same, you’ll want to know the sate for the added risk, revenue bonds
diferences — especially in terms of risk.
usually pay a higher rate of interest than
Municipal bonds, like corporate generalobligationbonds.Whenstudy-
bonds, essentially face two types of risk: ing the risk factors of revenue bonds, you
interest rate risk and default risk. Inter- also have to consider the type of revenue
est rate risk becomes clear when market bond involved. For example, some sec-

interest rates rise, causing the value of tors, such as housing and health care,
your existing municipal bonds to fall. No may be more volatile, as are some in-
one will pay you full price for your bonds dustrial revenue bonds. (These bonds,
when newly issued bonds carry a higher which are generally used to support a
10% OFF
rate — so if you plan on selling bonds be- speciic project, such as a new manufac-
Call 406-755-7500
fore they mature, you risk losing princi- turing facility, are sponsored by a gov-
pal. You can largely ignore this type of ernment entity — but the proceeds go to
LOCAL RENTALS
to reserve your vehicle today.
risk simply by holding your bonds until a private, for-proit business.)
with Discount Code R565700
maturity, at which point you will receive Of course, when evaluating the risk
the face value back, provided the issuer potential of municipal bonds, you don’t
Serving the Glacier Park Int’l Airport doesn’t default.
have to rely on guesswork. The ma-
Flathead Valley with
Downtown Whitefish And that brings us to the second type jor bond rating agencies — Standard &
4 Convenient AMTRAK Whitefish of risk: default risk. Historically, munic- Poor’s, Moody’s and Fitch — review mu-
ipal bond default rates have been much nicipal bonds to determine their cred-
Locations
2988 US HWY 93 South
lower than those of corporate bonds, itworthiness. There are no guarantees,

particularly lower-quality bonds. But but by sticking with the bonds that are
diferent types of municipal bonds car- “investment grade,” you can help reduce
ry diferent levels of default risk. Here’s the risk of owning a bond that goes into
a quick look at the two main categories default.
of municipals and their risk character- Municipal bonds can be valuable ad-
istics:
ditions to your portfolio. Besides provid-
• General obligation bonds — Gen- ing income that’s free of federal taxes,
eral obligation bonds generally inance
these bonds ofer you a chance to help
projects of a municipality. A general ob- support valuable projects in your com-
ligation bond issuer is required to do ev- munity. But, as we’ve seen, diferent
erything in its power, including raising “munis” have diferent risk factors — so
new taxes, to ensure that interest pay- make sure you know exactly what type
ments are paid on time and in full. This of bond you’re purchasing before you
requirement helps support the credit- write the check.
worthiness of general obligation bonds.

Jesse Rigler is a inancial advisor at Edward Jones in Kalispell.

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June 6
th
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