Things to Consider When Investing in Municipal Bonds

Recently FINRA, the Financial Industry Regulatory Authority, reissued an alert to investors on municipal securities—including municipal bonds or "muni bonds." These municipal bonds are securities issued by states, cities, counties and other governmental entities so that they can raise money to build roads, schools and a many other projects. Municipal securities can also include bonds issued by a governmental entity, to finance a project to be used by a third party.

By issuing this alert, FINRA is reminding investors that while 'munis' may be a relatively conservative investment, they do carry some of the following risks:

1. The current market value of a municipal bond may be hard to determine because many municipal bonds trade infrequently.
2. Defaults, while quite rare, do occur.
3. Information about financial problems that affect the bond's issuer has not always been readily available to investors.
4. In cases where an issuer has purchased bond insurance or some other protection feature, the higher overall credit rating of a bond may be more reflective of that protection than of the financial condition of the issuer.
5. A bond's market value may change for reasons having nothing to do with the financial condition of the issuer, such as a change in interest rates.

Not all municipal bonds are the same and investors should evaluate each bond carefully. The investor should ask how much risk he is willing to take, the purpose of the investment, when he might need the money, and whether or not it fits into his portfolio. Always make sure to check out the broker or financial advisor as well as the investment firm. Do they have the proper qualifications, is the firm registered with the SEC, FINRA and MSRB? FINRA encourages investors to check out the background of the broker/dealers on their BrokerCheck. Always do your homework.