how to buy municipal bonds

In the United States, there are more than 50,000 states, cities, counties and other local entities that issue a total of more than 2 million different municipal bonds [source: Securities Industry and Financial Markets Association].
Tax-free municipal bonds will comprise a more significant chunk of an investment portfolio as you get older and enter higher tax brackets.
Mutual fund managers use low-risk municipal bonds to balance higher-risk investments in the portfolio.
Municipal bonds are an important component of any investment portfolio.
You can employ an investment strategy called a bond ladder, in which you buy several different bonds with staggered maturity dates.
Roos, Dave.  "How Municipal Bonds Work"  15 August 2008. < ;  18 October 2014.
You can buy municipal bonds through your investment broker or stockbroker.
Another strategy is to invest in special mutual funds that only buy municipal bonds.
You can track the prices and interest rates of the best-known municipal bonds in the finance section of any major U.S. newspaper.
Municipal bonds can be purchased through an investment broker.
These closed-end funds do something that open-end funds like Vanguard’s cannot: They use derivatives or borrowed money to buy, typically, $8 of bonds for every $5 invested in the fund.
The carefully sculpted names for these souped-up funds lure in yield-hungry but cautious retirees: Nuveen Dividend Advantage Muni (NAD), Nuveen Quality Income Muni (NQU), BlackRock MuniHoldings Quality Fund II (MUE).
That makes sense if (a) you buy newly issued bonds, paying the same price as institutional buyers; (b) you are highly confident you won’t need to sell before the bonds mature; (c) you have hours and hours of time to research the bonds; and (d) you have so much money that you can build a richly diversified portfolio with $100,000+ in each position.
If you own muni bonds directly and need some ready cash you will have to sell in the secondary market, at whatever bid price a middleman deigns to offer.
If you invest at least $50,000 you qualify for the low cost shares of the Vanguard fund (ticker: VWLUX), which bear an annual expense burden of 0.12%. That’s $120 on a $100,000 stake.
You don’t need to have that cash sitting in a zero-yield money market fund.
Like all fixed income securities, the market prices of municipal bonds are susceptible to fluctuations in interest rates.
As with all bonds, investors run the risk that inflation will diminish the purchasing power of a municipal bond’s principal and interest income.
In general, the interest you earn from your tax-exempt municipal securities is exempt from federal income tax and in some cases, state or local income tax, depending on whether you are a resident of the state that issued the bond.
Many municipal bonds carry provisions that allow the issuer to call or redeem the bond prior to the actual maturity date.
Zero-coupon municipal bonds are issued at an original issue discount, with the full value, including accrued interest, paid at maturity.
While most investors think of municipal bonds as tax-exempt investments, this may not always be the case, as there are instances where the income generated by a municipal bond may be taxable.
While municipal bonds’ coupons are often lower than those offered by similarly rated corporate bonds, the fact that interest income is tax-free can result in the yields being comparable, or even higher in some cases.
Bonds may be sold at a discount for a variety of reasons, including changes in interest rates, changes in market conditions, a change in the issuer’s credit rating, or other events impacting the issuer.
According to the Municipal Securities Rulemaking Board (MSRB), it is much more common to identify basic characteristics of a municipal bond in which an investor is interested in investing (e.g., state, creditworthiness, maturity range, interest rate, or yield, market sector, etc.) and then to make a choice from a set of municipal securities that meet those criteria.
The vast majority of municipal bonds are not traded on a regular basis; therefore, the market for a specific municipal bond may not be particularly liquid.
The interest on some municipal bonds is taxable because the federal government will not subsidize the financing of activities that do not provide significant benefit to the public.
Despite the fact that many municipal bonds have high credit ratings, there is a risk of default in any bond investment.
These are revenue bonds issued by municipal agencies called "conduit issuers" that are third-party entities that act on behalf of the actual borrowers, typically private nonprofit (501(c)(3)) entities.
Principal and interest payments for revenue bonds are secured by revenues generated by the issuer or by certain taxes such as sales, fuel, or hotel occupancy taxes.
While municipal bonds can offer attractive effective yields and can be a way to generate tax-free income, they may not be right for investors in every tax bracket or for every type of account.
With revenue bonds, the interest and principal are dependent on the revenues paid by users of a facility or service, or other dedicated revenues including those from special taxes.
These are municipal bonds issued at a price below face value (par) which qualify for special treatment under federal tax law.
Bonds are "escrowed to maturity" when the proceeds of a refunding issue are deposited in an escrow account for investment in an amount sufficient to pay the principal and interest on the issue being refunded.
These are provisions that give a bond issuer the right to call the bonds due to a one-time occurrence, such as a natural disaster, interruption to a revenue source, unexpended bond proceed, or canceled projects.
Historically, municipal bonds rated by a Nationally Recognized Statistical Rating Organization (NRSRO), and in particular general obligation bonds, have experienced very low default rates.
If interest rates rise, market prices of existing bonds will typically decline, despite the lack of change in both the coupon rate and maturity.
In general the bond market is volatile, and fixed income securities carry interest rate risk.
The difference between the issue price and the face value is treated as tax-exempt income rather than as capital gains if the bonds are held to maturity.
Municipal bonds are debt obligations issued by public entities that use the loans to fund public projects such as the construction of schools, hospitals, and highways.
Nobody likes the idea of having to pay taxes, and most municipal bonds provide a way to receive income free from federal, state and local taxes.
Certificates of deposit (CDs) are safer and have a major yield advantage, even after factoring in the tax benefits of municipal bonds.
However, 10-year AA-rated municipal bonds are not earning close to 6 percent.
If you buy a municipal bond that yields 6 percent, then it would be the equivalent of a taxable yield of 8 percent.
Only two years ago, at the beginning of 2011, one could buy a twenty year AA-rated municipal bond with a yield of 5.25 percent.
Let’s say your effective tax rate including federal, state and local income taxes is 25 percent.
This is not to say that the tax benefit is not important, particularly if you live in a place like New York where there both city and state taxes which can be avoided by buying the right municipal bonds.
First of all, most tools for estimating the tax benefits of owning municipal bonds provide inaccurate results that overestimate the benefits.
As you can see, CD yields after factoring in the tax benefits for a middle class to wealthy family are much higher than municipal bonds.
As CDs are safer than bonds, the logical move would be to buy CDs instead of municipal bonds if the CDs provided the same or a higher after-tax return.
While municipal bonds have a very low default rate, they do sometimes default.
Investment grade municipal bonds are very safe, but FDIC-insured CDs are safer.
“Funds better than bonds”: If you assume that you need a minimum of 10 bonds for basic diversification and at least $100,000 per bond to get trading costs down, it can take $1 million to build a feasible portfolio of individual munis – although many investors, including Phil Potter, whom I profiled in the column, have done it for less.
Another factor: Even though rising rates will take a chunk out of your principal at a mutual fund, the fund can reinvest the incoming interest payments at higher yields as rates go up – reducing what bond managers call “reinvestment risk.” Small investors can’t always reinvest their interest coupons at the latest, best rate.
Bear in mind, then, that if you buy a closed-end muni-bond fund and interest rates spike upward, you are likely to be hit by a double whammy: The value of the underlying portfolio will fall, and the share price is likely to plunge (meaning that the discount will get deeper, and you might have to sell for much less than the assets are worth).
Even if you pay a fat 3% “markup” or trading cost to buy an individual muni, you’ll break even relative to a mutual fund if you hold the bond for at least three years.
A reported inter-dealer price paid by some other dealer is not necessarily indicative of the at-hand price consideration, especially if the inter-dealer price is “stale” (older than more than a few minutes, hours, or days.) A better solution is for an investor to request that a purchase transaction be done by their broker “as agent.” As agent, they are required to disclose the sales credit amount on the transaction confirmation.
Still can’t find the bonds you want, or have any further questions? Call us at 800-FMS-BONDS (367-2663) or e-mail us at Our tax-free bond experts will assist you with the information you need.
This will take you to the "Bond Finder" page, where you will be given the opportunity to “View All Offerings” or choose to view only bonds from a particular category.
To access our offerings, click on the "Bond Offerings" button at the top left corner of any page.
If you would like to purchase the bonds, click on the "Buy Bond" button.
On the "Bond Search Results" page, you will see offerings listed in maturity date order.
After clicking on the "Buy Bond" button, you will be brought to the "Bond Order Preview" page.
General obligation bonds are backed by the issuer’s ability to collect taxes, while revenue bonds are issued by entities like water companies or sewage treatment plants that generate revenue over time, and then use this income to make interest payments and repay the loan in its entirety on the maturity date.
Municipal bonds (also known as “munis”) are issued by states, cities, counties and other government entities below the federal level in order to raise money for public improvements like highways, bridges, schools, hospitals, sewer systems, water treatment plants and other such projects.
But if the Fed were to bump up interest rates to a rate higher than your bond’s coupon, your bond won’t look so hot compared to new bonds issued with the higher coupon rate.
Fixed-income investments are subject to various risks including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.
Increased time-to-maturity, higher coupons, longer duration, illiquidity and bonds trading at a discount are all additional factors which can increase the volatility of bond prices.
Some investors gradually shift from higher-risk investments like stocks to lower-risk investments like municipal bonds as the time horizon for a given financial goal approaches.
Both types of municipal bonds pay periodic interest every six months, or twice per year until the bond matures.
Although it is possible to make sound investments in virtually any market environment, it’s usually a good idea to evaluate the Fed’s current and anticipated policy on interest rates before and while holding bond investments.
Laddering is a bond strategy that spreads your risk over a series of different maturities, while maintaining an average maturity that suits your investment goal’s time horizon.
When comparing these bonds to other investments always be sure to adjust coupon rates so you are evaluating after-tax yields for both investments.
If your bond’s coupon rate is higher than the current interest rate target set by the Fed, your bond is going to look pretty sweet to investors, driving its price up.
From a simplistic view, municipal bonds as a whole are investments which are considered to involve more risk than Treasury bonds, but less risk than corporate bonds.
The prospectus of a mutual fund or ETF contains this and other information, and can be obtained by emailing Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.
Investors seeking to generate both income and capital appreciation from their bond portfolio may choose an active portfolio management approach whereby bonds are bought and sold instead of held to maturity.
The most basic strategy for investing in municipal bonds is to purchase a bond with an attractive interest rate, or yield, and hold the bond until it matures.
While municipal bonds are available in both taxable and tax-exempt formats, the tax-exempt bonds tend to get the most attention because the income they generate is for most investors exempt from federal and, in many cases, state and local income taxes.
If interest rates in the marketplace rise, the bond you own will be paying a lower yield relative to the yield offered by newly issued bonds.
Tax-Bracket Changes: Municipal bonds generate tax-free income, and therefore pay lower interest rates than taxable bonds.
If your primary investing objective is to preserve your capital while generating a tax-free income stream, municipal bonds are worth considering.
Call Risk: Many bonds allow the issuer to repay all or a portion of the bond prior to the maturity date.
When interest rates fall, newly issued bonds will pay a lower yield than existing issues, which makes the older bonds more attractive.
By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or “principal.” A municipal bond’s maturity date (the date when the issuer of the bond repays the principal) may be years in the future.
Call risk. Call risk refers to the potential for an issuer to repay a bond before its maturity date, something that an issuer may do if interest rates decline — much as a homeowner might refinance a mortgage loan to benefit from lower interest rates.
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”).
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.
In addition, munis often represent investments in state and local government projects that have an impact on our daily lives, including schools, highways, hospitals, housing, sewer systems and other important public projects.
Municipal bonds (also known as “munis”) are attractive to many investors because the interest income is exempt from federal income tax, and in many cases, state and local taxes as well.
The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product or an endorsement or affirmation of any specific investment strategy.
For more information on municipal bonds and the tax status of municipal bonds, please visit the Investment Education section of Scottrade’s Knowledge Center.
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Forbes contributor Kelly Phillips Erb notes there’s a good reason for the tax exemptions (some munis are also exempt from state taxes): The government has an interest in encouraging private investment in vital public projects.
Munis have been popular with retail investors, particularly wealthy ones, in part because of the federal tax exemption on the interest from the bonds.
The muni tax proposal has drawn stiff opposition from state and local governments, which say it would increase the cost of projects financed by the bonds, including schools, hospitals, roads, transit, water and other critical infrastructure.
Investors have been bailing out of beleaguered municipal bonds in droves, worried that higher interest rates will drive down the prices of the bonds.
"I am against conventional wisdom on munis at the moment," says Money Morning Chief Investment Strategist Keith Fitz-Gerald.
"If you’re using munis as an intelligent part of a portfolio and looking for the income they provide, many munis have been beaten down to the point that they’re way under their net asset value," Fitz-Gerald says.
"A higher tax bill on municipal bonds means that affected investors – those that can afford to shop around – will necessarily seek out other options," Erb wrote.
That, in turn, could lead to an increase in interest rates and a corresponding decline in the price of munis, investors fear.
If the tax exemption is limited, Erb notes, it will prompt some muni investors to look to other places to invest their money.
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In fact, it is our core product and our brokers have in-depth knowledge of the market as well as the expertise, relationships and resources to provide High-Net-Worth individuals with attractively priced, quality tax-exempt municipal bonds as well as taxable municipal bonds.
When an investor purchases municipal bonds, they are lending money to a state or local government entity, which in turn promises to pay the investor a specified amount of interest and return the principal on a specific maturity date.
The muni bond market is so vast that it’s size, which consists of approximately 4 trillion dollars of outstanding bonds, is hard to imagine and sometimes makes finding specific information difficult to obtain.
There is no central place or exchanges to sell or buy municipal bonds; it is a huge over-the-counter market consisting of a network of independent dealers.
We offer investors the ability to compare prices on a specific tax-exempt municipal bond in a relatively short period of time.
A recent report indicated that retail municipal bond buyers tend to pay about 2% more than institutional buyers for the same bonds when buying municipal bonds outside of the retail order period.
To get to the retail order periods simply click the “municipal bonds new issues link in the bond section of You will need an account to get that that page.
Bond issuers offer bonds through the retail order period first, as they want to make sure that individual investors get a fair shake in the new deals.
If you want to know how to buy municipal bonds, you should start by getting to know the retail order period, as this is where you are likely to get the best price.
When buying municipal bonds through the retail order period, you know the credit rating is fresh.
The price difference between what retail and institutional buyers pay is so large that “EMMA”, the official online system for municipal bond price reporting, lists institutional and retail trades separately under the following categories: “customer bought”, “inter-dealer trade” and “customer sold”.
The majority of new municipal bond issues have a retail order period where non institutional customers have first pick of the new issue.
Municipal bond funds offer professional management of a bond portfolio.  When investing in a municipal bond fund, a manager or group of managers would select and buy bonds for the mutual fund.  As an investor, you would simply buy shares in the municipal bond mutual fund through either a traditional or online brokerage firm or, directly from a mutual fund company.  One of the advantages of bond mutual fund is that they offer an investor diversification with a smaller dollar amount.  One of the disadvantages of a bond mutual fund is the additional level of expense from the fund management fee.
The secondary market allows investors to buy bonds, which have already been issued, from other investors, bond dealers, banks and brokerage firms.  In order to purchase bonds, you would first need to open an account with a firm or bank that deals in bonds.  You could go with an online do-it-yourself firm or a traditional bank or brokerage firm.
Individual municipal bonds can be bought through bond dealers, banks, brokerage firms and in a few cases directly from the municipality.  Individual municipal bonds can either be bought on the primary market, which is for new issue bonds or on the secondary market, which is a market for trading bonds after the bond has already been issued.

Once you’ve run those numbers a few times, you’ll be able to tell at a glance whether a particular muni bond makes sense for your portfolio.
Municipal bonds, which are issued by cities, states and other local government entities, are free from federal taxes.
When an investor buys a muni, he’s expressing a willingness to forgo a higher yield on his investments in exchange for not having to pay taxes.
But for the rest of the world, buying a taxable bond that pays a higher interest rate usually makes more sense.
And if the bond is issued in the state in which you live, they’re also free of state and local taxes.