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The municipal bond story

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While many people purchase municipal bonds as part of their overall investing strategy, they may not know the interesting story behind municipal bonds. Learn more about this story - why municipal bonds are created, how they work, and who plays a role in the process.

Note: There are different types of municipal bonds. This video focuses on the general obligation municipal bond type only.

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Related Lessons

  • Buying and selling municipal bonds in the secondary market

    Trading municipal securities in the secondary market is an entirely different experience than a new issue bond offering. Learn more about the differences and what you should pay extra attention to during the process.

  • Bond ratings

    Just as individuals have their own credit report and rating issued by credit bureaus, bond issuers generally are evaluated by their own set of ratings agencies to assess their creditworthiness.

Fixed Income at Fidelity

Charts, screenshots, company stock symbols and examples contained in this module are for illustrative purposes only.

In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities). Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Lower-quality fixed income securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Foreign investments involve greater risks than U.S. investments, and can decline significantly in response to adverse issuer, political, regulatory, market, and economic risks. Any fixed-income security sold or redeemed prior to maturity may be subject to loss.

Interest income earned from tax-exempt municipal securities generally is exempt from federal income tax, and may also be exempt from state and local income taxes if you are a resident in the state of issuance. A portion of the income you receive may be subject to federal and state income taxes, including the federal alternative minimum tax. In addition, you may be subject to tax on amounts recognized in connection with the sale of municipal bonds, including capital gains and “market discount” taxed at ordinary income rates. “Market discount” arises when a bond is purchased on the secondary market for a price that is less than its stated redemption price by more than a statutory amount. Before making any investment, you should review the official statement for the relevant offering for additional tax and other considerations.

The municipal market can be adversely affected by tax, legislative, or political changes and the financial condition of the issuers of municipal securities. Investing in municipal bonds for the purpose of generating tax-exempt income may not be appropriate for investors in all tax brackets or for all account types. Tax laws are subject to change and the preferential tax treatment of municipal bond interest income may be revoked or phased out for investors at certain income levels. You should consult your tax adviser regarding your specific situation.

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