Denton County Living Well Magazine Winter 2014

rs MUNICIPAL BONDS MAY BE GOOD FOR YOUR PORTFOLIO Byline Courtesy of Barlow Capital Advisors I f your investment portfolio consists of only equities, you may want to diversify. Stocks and other equity securities are an important part of your investment mix, but you may also want to consider some fixed income investments like municipal bonds. Income is generally free from federal taxes and state taxes for residents of the issuing state, however capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT). It is also important to note that municipal bonds typically have very low default rates. According to the Bond Market Association, less than 1 percent of municipal bond issues sold since 1940 have gone into either technical or actual default. However, past performance does not guarantee future results. Municipal bonds are also usually issued with a credit enhancement, such as bond insurance or a bank letter of credit, which helps provide a stronger assurance of timely payments. When you purchase a new-issue municipal bond, you actually make a loan to the issuer, which may be a city, township or school district, for example. These entities use the funds raised from the sale of bonds to finance new streets, water and sewage systems, hospitals, parks, and many other improvement projects. In return for the use of your money, the issuer promises to pay you not only the principal amount back when the bond matures, but also a set interest rate, or coupon, during the term of the bond. Yields and market values will fluctuate if the bonds are sold before maturity. Bonds are subject to market risk and, if sold prior to maturity, may be worth more or less than their original cost. Investors should keep in mind that as interest rates rise, existing bond prices of already outstanding fixed income securities tend to fall. Longterm bonds are generally more exposed to interest rate risk than short-term bonds. For many in ٕ

Denton County Living Well Magazine Winter 2014 | Page 23