Friend: Can you explain to me the basics of how a municipal bond will increase my current income? Under a standard bond agreement, if you were to purchase a 10-year, $1,000 municipal bond with in interest each year, and at the end of the 10-year You a 4% coupon, you would receive period, you would receive the par value of Friend: OK, and am I guaranteed to receive these interest payments and the par value? You Well, that depends. Within the category of municipal bonds, there are both general obligation bonds, which fund bonds, which guaranteed by the municipality, and specific projects and are repaid Friend: Are there any other general features I should be aware of? You: Municipal bonds tend to have a relatively return than other types, in part due to the fact that unlike other bonds, the interest income is federal income taxes. The return also depends on whether the bonds are callable, meaning that the issuer can retire the bond (by paying you back and ceasing to pay interest payments) at any point before the maturity date Friend: Why would an issuer want to retire a bond early? You: Suppose that 6 months after you purchase the bond, the market rate for interest on this type of From the issuer's perspective, bond falls to 2%. This will cause the to the lower interest rate means that he or she would be issuing new bonds at this lower rate than continuing to pay you 4% Got it. Thanks for your help! Friend: Any time! You: Friend: Can you explain to me the basics of how a municipal bond will increase my current income? Under a standard bond agreement, if you were to purchase a 10-year, $1,000 municipal bond with in interest each year, and at the end of the 10-year You a 4% coupon, you would receive period, you would receive the par value of Friend: OK, and am I guaranteed to receive these interest payments and the par value? You Well, that depends. Within the category of municipal bonds, there are both general obligation bonds, which fund bonds, which guaranteed by the municipality, and specific projects and are repaid Friend: Are there any other general features I should be aware of? You: Municipal bonds tend to have a relatively return than other types, in part due to the fact that unlike other bonds, the interest income is federal income taxes. The return also depends on whether the bonds are callable, meaning that the issuer can retire the bond (by paying you back and ceasing to pay interest payments) at any point before the maturity date Friend: Why would an issuer want to retire a bond early? You: Suppose that 6 months after you purchase the bond, the market rate for interest on this type of From the issuer's perspective, bond falls to 2%. This will cause the to the lower interest rate means that he or she would be issuing new bonds at this lower rate than continuing to pay you 4% Got it. Thanks for your help! Friend: Any time! You