What Are Infrastructure Bonds And Should You Invest In Them?

What are infrastructure bonds and should you invest in them? When a government issues bonds, they promise to repay the amount of the bond with a set amount of interest, just like anybody else. When bonds are issued with the objective of raising money to develop the infrastructure of some municipality, be it a bridge, a sewage system, or even roads, they are sometimes called “infrastructure bonds.”

Bonds are generally low-risk investments, and therefore, good options of current income and preservation of capital are your goal. However, there are a few gotchas with these (or any) types of bonds.

• What opportunities will you be giving up if you invest your money in these bonds? This is called opportunity cost. If you use a tax refund to buy bonds instead of buying a new car, that car is your opportunity cost. Be sure that your opportunity costs are not going to be regretted.
• Inflation is another element of the equation that needs to be kept in mind. When the bond matures, will it actually be worth anything, after compensating for inflation? Try this example: If you buy a bond for $2,000 that will repay a total of $22,00 in 5 years, will $200 in the future be worth $200 right now? If inflation increases over the 5 years, you may end up losing an opportunity cost, but real cash as well.
• Tax deductibility. While municipal bonds are usually exempt from federal income taxes (and often state income taxes as well if you live in the same state), there are some caveats. Most importantly, if you buy infrastructure bonds whose proceeds are used to finance a project of a private company, the interest on those bonds is not exempt from the Alternative Minimum Tax. So if you think you may be subject to the AMT, you are probably better off avoiding these bonds.
• Be careful when investing. This is your money. Even low-risk investments still entail some risk. Gain as much knowledge about your options and all the information on bonds as possible. Never rush into an investment because the pickings look fat or you are worried that you will miss something. There is always going to be money out there. Good investments will come along. When money is involved, patience is the better part of shrewdness.

Infrastructure bonds are an interesting investment option, especially for those in high tax bracket. But they are not without risk and should be considered carefully, the same as any other investment. There are plenty of places to go for good financial advice and specific pointers on bond purchases such as these. Remember the answer to your earlier question of what are infrastructure bonds and should you invest in them.

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