When we talk about investing at She Spends, we rarely delve into the bond market. This is partially because there is less public information about bonds than there is about stocks. It’s also because they can get a little confusing. That said, municipal bonds are an awesome and somewhat unconventional way to invest in your community. Here’s our guide to doing just that.
What is a bond?
A bond is a type of investment in which an investor loans money to an entity (either a corporation or a government, usually), which borrows that money for a fixed period of time with a defined interest rate. Envision the investor as a bank. A government or corporation comes to the investor with a promise to pay back a loan in a certain amount of time at a certain rate. If the investor accepts, they loan the money, with the caveat that they will receive that money — and more — back in time.
Some bonds make regular payments, called coupon payments, based on a fixed rate of interest. For instance, if you loaned $100 to a company with a 5% coupon rate for 10 years, you’d receive $5 every year for the 10 years, then at the end of that time period, you’d also get your $100 back. In total, you’d receive $150.
What happens if they don’t pay me back?
Bonds are given ratings by a credit rating agency like Moody’s or Standard & Poor’s. These are like grades: A good bond would receive something like a triple A rating, while a junk bond receives a rating of BB or lower. These ratings help investors make smart decisions about the bonds they buy, but that doesn’t mean all companies and governments make good on their loan promises.
When a bond defaults, it means that a government or a company has failed to pay the interest or total loan back to the investor. Sometimes, a bond defaults but the issuer is able to pay it back, just not on time. Other times, when a bond issuer is unable to pay you back, they go into bankruptcy. In a bankruptcy process, a company or government will sell off its assets in order to pay its investors back.
What is a municipal bond?
A municipal bond is issued by a local government. It funds local projects and governmental functions. They are often tax-exempt, which is a bonus for you!
How does it help my community?
There is a whole lot a municipal bond can do. They are often used for infrastructure projects like building bridges, paving roads or fixing up parks. They can also be used for local schools or hospitals, sewers or water facilities, and public power projects.
How do I buy one?
You have a few options for buying municipal bonds. You can buy them through a mutual fund, on a site like Vanguard. You can also buy them individually, either directly through your municipality or via a bond dealer, banker or brokerage firm in your area.
- Alicia McElhaney / She Spends Issue #55