A corporate bond is a debt instrument issued by a company to raise capital, while a municipal bond is a bond issued by a city, town, or state to raise money for public projects. Though municipal bond interest carries certain tax exemptions, corporate bond interest is always taxed.
While corporate bonds all have some level of default risk (no matter how small), U.S. Treasury bonds are used as a benchmark by the market because they have no default risk. Therefore, corporate bonds always earn a higher interest rate than Treasury bonds.
In the case of municipal and corporate debt, munis are generally less liquid than their corporate counterparts with comparable ratings. This is due to the relatively high daily trading volume of corporate debt than municipal bonds.
Understanding Municipal Bonds
A municipal bond is a debt obligation issued by a nonprofit organization, a private-sector corporation or another public entity using the loan for public projects such as constructing schools, hospitals and highways.
A corporate bond is a type of debt security that is issued by a firm and sold to investors. The company gets the capital it needs and in return the investor is paid a pre-established number of interest payments at either a fixed or variable interest rate.
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Many bond investments have gained a significant amount of value so far in 2020, and that's helped those with balanced portfolios with both stocks and bonds hold up better than they would've otherwise. ... Bonds have a reputation for safety, but they can still lose value.
Compared to individual bonds, buying municipal bonds as part of a mutual fund or ETF provides relative safety because it lowers the impact of a default, says Mike Piershale, ChFC, president of Piershale Financial Group. If you buy bonds in a fund of 500 and one defaults, you'd lose 1/500th of your money.
While the interest on government bonds is exempt from state and local income taxes, and the interest on municipal bonds is typically exempt from federal income taxes, the interest on corporate bonds is not exempt from taxation at any level.
How Do Muni Bonds Trade? The municipal bond market transacts over-the-counter – or OTC – which means that most trades occur outside of any centralized exchange (like the NYSE for equities).
The Bottom Line. If you are investing for income, either municipal bonds or money market funds will pay you interest. Just know that bonds can lose value and money market funds most likely won't. Note also that since municipal bonds are income-tax free, you are actually making more than the interest rate would indicate ...
There are two major types of municipal bonds: “general obligation bonds” and Investor Assistance (800) 732-0330 www.investor.gov Page 2 “revenue bonds.” Because these types come in many varieties, you should look beyond the short-hand label when deciding whether to purchase.
A municipal bond is a debt security that has been issued by a local government entity. Examples of these issuers are state, county and city governments. Municipal bonds are commonly used to fund the construction of roads, schools, airports, hospitals, wastewater treatment facilities and other infrastructure projects.
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