Why Insured Munis?

Physician's Money Digest, October31 2004, Volume 11, Issue 20

Municipal bond investors lookingfor an extra margin of safety often shopfor munis that are insured. In fact, morethan half of the muni bonds issued lastyear were insured, which guaranteesbondholders that they will be reimbursedif the issuer defaults. Insurancecomes at a price, though, and somebond mavens question whether theprice is worth the loss in yield. With adefault level of less than 1%, youshouldn't be worried about default,they say, especially if you stick to munibonds from issuers with good credit ratings.Diversifying can also cut defaultworries, but you generally need $1 millionto diversify effectively. If you haveless, muni bond funds may be a betteridea. Look for funds with low expenseratios from fund families like Vanguard(www.vanguard.com) and TIAA-CREF(www.tiaa-cref.org).