SEC Issues Investor Bulletin Regarding Municipal Bonds

by Wall Street Fraud on March 26, 2012

pennsylvania securities fraud attorneyThe SEC’s Office of Investor Education and Advocacy recently issues an Investor Bulletin aimed to educate individual investors about municipal bonds. From the perspective of securities fraud attorney, the bulletin is useful for investors because it highlights some of the most common risks associated with these securities.

To start, many investors may be unfamiliar with municipal bonds. As detailed by the SEC, they are debt securities issued by states, cities, counties, and other governmental entities to fund day-to-day obligations and to finance capital projects such as building roadways or sewer systems. By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments

Bond investments are generally suitable for investors seeking a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. While “munis” have historically been considered relatively safe investments, they do, like all bond investments, carry risk, particularly in these uncertain economic times.

As detailed by the SEC, below are some of the most common risks:

Call risk.  Call risk refers to the potential for an issuer to repay a bond before its maturity date, although bond calls are less likely when interest rates are stable or moving higher.  Many municipal bonds are “callable,” so investors who want to hold a municipal bond to maturity should research the bond’s call provisions before making a purchase.

Credit risk.  This is the risk that the bond issuer may experience financial problems that make it difficult or impossible to pay interest and principal in full (the failure to pay interest or principal is referred to as “default”).

Interest rate risk.  Bonds have a fixed face value, known as the “par” value.  If bonds are held to maturity, the investor will receive the face value amount back, plus interest that may be set at a fixed or floating rate.  The bond’s market price will move up as interest rates move down and it will decline as interest rates rise, so that the market value of the bond may be more or less than the par value.

 Inflation risk.  Inflation is a general upward movement in prices.  Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest.  It also can lead to higher interest rates and, in turn, lower market value for existing bonds.

Liquidity risk.  This refers to the risk that investors won’t find an active market for the municipal bond, potentially preventing them from buying or selling when they want and obtaining a certain price for the bond.  Many investors buy municipal bonds to hold them rather than to trade them, so the market for a particular bond may not be especially liquid and quoted prices for the same bond may differ.

If you have been the victim of municipal bond fraud or negligence, we may be able to help you recover your losses. Contact us today at 215-839-3953 for a free consultation.

At Wall Street Fraud, we are dedicated to offering assistance to those who have been hurt by improper corporate or investment practices.

If you have been the victim of stock brokerage fraud, securities fraud, mutual fund fraud, stockbroker fraud, annuities fraud, or any other type of investment fraud or negligence, please contact our securities fraud attorneys today for a free case evaluation. Our talented and aggressive legal and professional staff is eager to help you recover your losses.

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