High yield municipal bonds are issued by the local or state governments that consist of credit ratings that are below the investment grade. They are an excellent way to generate an income that is tax free and can produce high yields than any savings account. Investors prefer to own high yield municipal bonds since they offer income that is higher than the investment grade municipal bonds.
Investors can purchase these bonds with short term issues and then pay the interest later on in a year. But high investment yield always comes along with a certain amount of risk and it can be dangerous especially if the investor is uninformed.
Municipal bonds can be purchased through an income fund or individually. These income funds can be of many types that include national, insured and state specific. Each type of this fund focuses on the various types of bonds. For instance the national fund makes the choice of high yield municipal bond whereas the state specific fund chooses the bonds from a specific state or region.
Munis are liquid which means that you can cash out your money at any given point of time. But you need to check the yield of the bond in order to sell the bond before its maturity since you will obtain the current yield rate. The minimum investment that is required for the munis is about five grand. It is affordable for the investors who wish to receive steady payments out of their bond investment.
One of the best advantages of the munis is that you can sell the bonds before their maturity and gain maximum benefit out of selling the bonds in the open market rather than keeping it until it is matured.
Since you provide loans to the government they do not charge you any tax from the returns that are obtained from the investments.
The investment grade market is larger than that of the municipal market. Hence the high yield muni market is less liquid which means that it has lesser trading volumes. This is of concern for the investors who are in individual securities.
High yield muni market is greatly affected by the credit risk and less affected by the interest rate risk. High yield municipal bonds are sensitive to the economy fluctuations. Higher yield is associated with higher risk as a result there can be higher price fluctuations on the high yield municipal bonds.
High yield municipal bonds are suitable for investors with a long term time horizons. These bonds are divided into two types. The first type is the general obligation bond where the interest and the principal amount of money is secured. The most striking fact of these bonds is that they are approved by the voter.
The second type of municipal bond fund is the revenue bond where the interest rates and the principal amount is secured by the revenues that are obtained from the tolls. These bonds are mostly issued by some special authorities.