Municipal bond rates are not important when deciding what municipal bonds to invest in. However, most people, especially new municipal bond investors look at the municipal bond rates before anything else and invest in the bonds with the highest rates. While sometimes municipal bonds with highest interest rates are the best investments, it is not always the case. After all municipal bond rates do not take into account the prices of the bonds and the maturity dates.

Municipal bond rates or municipal bond interest rates are also called coupon rates. Coupon rates are published in financial papers next to the name of the municipal bonds. Municipal bond rates do not change over the life of the bond and they are set at the time of the issue based on the needs of the issuer. When the market condition changes, the municipal bond rates still do not change.

A bond can have many different characteristics from other bonds. Different characteristics lead to different risk level and rate of return. When a bond carries higher risk, the investor expects to be paid more for buying that bond. For example, a municipal bond that matures in 10 years time should have higher interest rates than a municipal bond that matures in 1 year because money tied up for 10 years is riskier. However, usually municipal bond rates do not correlate with length of time to maturity.

When considering what bonds to buy, it is not adequate to consider just the municipal bond rates. In fact, some investors do not look at municipal bond rates at all. These investors prefer to consider the yields of municipal bonds because the yield takes into account many other important factors such as time to maturity and price of the bond.

There are many types of yields that can help investors decide which municipal bonds to buy. The municipal bond rates are use when calculating municipal bond yields. Usually, the higher the municipal bond rates, the higher the yield, but not always. The price of the bond as well as the time to maturity play important roles in calculating the yield.

Municipal bonds can be sold or bought at premium, at par or at discount. It is no good buying municipal bonds with very high interest rates if you have to pay a lot for them. For example, which is better, a $10 investment that pays you $1 for 10 days and also $10 at the end or a $30 investment that pays you $1 for 10 days and only $10 in at the end? Of course the first because you invested $10 and get $20 back whereas in the latter case, you invest $30 and only get $20 back which means you just lost $10 in that investment.

When a bond has a longer life or longer time to maturity, the investor should be paid more. Municipal bond interest rates should increase when the time to maturity increases. This is because anything can happen during the time to maturity. The market interest rates could increase making an investor’s municipal bond investment not worth while. The issuer could be in trouble or the project that the bond is based on could be halted. There are many reasons why investors need to be compensated more for longer life of the bond. However, this is not always the case.

Because so many things could change over time, the municipal bond rates alone cannot judge how good the bonds are. You need to look at other factors such as the yields, the price of the bond as well as the issuer. Even municipal bonds can be risky and not worth investing sometimes.