Where to Buy Municipal Bonds

If you're interested in investing in municipal bonds, commonly referred to as "munis," this guide will walk you through where to buy them and provide essential insights into making informed decisions. Municipal bonds are debt securities issued by states, municipalities, or counties to finance public projects such as building schools, highways, or water and sewer systems. Investing in these can be an appealing option for those looking to preserve capital and receive tax-advantaged income.

Understanding Municipal Bonds

What Are Municipal Bonds?

Municipal bonds are instruments that allow governments to borrow money. Investors purchase these bonds, effectively lending money to the issuer, which is a public entity. In return, the investor receives periodic interest payments (usually semiannually) and the return of the bond's face value at maturity.

Types of Municipal Bonds

Municipal bonds generally fall into two categories:

1. General Obligation Bonds (GO Bonds):

   • Secured by the issuer's taxing power.
   • Often considered safer, as they are backed by the full faith and credit of the issuing municipality.

2. Revenue Bonds:

   • Repaid with revenues generated by the specific project they finance.
   • Slightly higher risk than GO bonds due to dependency on the success of the project.

Tax Advantages

Munis are particularly attractive because the interest earned is exempt from federal income tax. If you invest in bonds issued by your state, the interest might also be free from state and local taxes.

Places to Buy Municipal Bonds

There are several avenues for purchasing municipal bonds. Each option has its own set of considerations regarding accessibility, cost, and convenience.

1. Bond Brokers

Financial brokers often trade and hold municipal bonds in inventory. You can purchase bonds through:

• Full-Service Brokerage Firms: These firms offer extensive guidance and personalized service, typically at a higher commission. Examples include Merrill Lynch and Morgan Stanley.

• Discount Brokerage Firms: Low commission costs but usually lack personalized investment advice. Examples include E*TRADE and Charles Schwab.

2. Online Trading Platforms

With technological advancements, many investors now buy bonds through online trading platforms such as:

• Fidelity Investments: Offers an array of muni bonds with filtering tools to tailor searches to specific criteria like yield or maturity date.

• TD Ameritrade: Provides a robust platform with educational resources and tools for bond pricing and yield calculations.

3. Direct Purchase from Municipalities

Occasionally, municipalities allow direct purchases. These transactions might necessitate initial research but can result in fewer middlemen fees and competitive pricing.

• Municipal Websites: Cities and states sometimes list offerings on their official web pages or finance sections.

4. New Issue Offerings

New issues are bought directly from the underwriter during the initial offering period. This option allows for buying at par value but can require guidance:

• Contact Underwriting Firms: Invest in new municipal bond issues by directly contacting the firms underwriting them. This route requires keeping an eye on new issues scheduled for release.

5. Bond Funds or ETFs

Alternatively, consider bond funds or exchange-traded funds (ETFs) specializing in munis. These funds pool investor resources to purchase a diversified portfolio of bonds, mitigating risk through diversification:

• Vanguard Municipal Bond Fund: Offers a diversified portfolio of municipal bonds from different issuers.

• iShares National Muni Bond ETF: Provides exposure to a broad range of municipal bonds, offering steady tax-exempt income.

Factors to Consider When Buying Municipal Bonds

When considering municipal bonds, keep these factors in mind to optimize your investment experience:

Credit Ratings

Credit ratings assess the bond issuer's financial stability. Agencies such as Moody's, Standard & Poor's (S&P), and Fitch provide these ratings:

• Investment Grade: Bonds rated 'Baa/BBB' or above are considered stable.
• Speculative Grade: Ratings below 'Baa/BBB' signify higher risk and potential for yield.

Interest Rate Environment

Interest rate fluctuations can significantly affect bond prices. Rising rates typically cause bond prices to drop and vice versa. Evaluate the interest rate environment to predict bond market movements.

Maturity Date

Bonds are issued with varying maturities:

• Short-Term: Generally less than three years.
• Intermediate-Term: Between three to ten years.
• Long-Term: More than ten years.

Consider your financial goals and investment horizon when choosing.

Common Questions & Misconceptions

Are Municipal Bonds Risk-Free?

No investment is ever risk-free, including municipal bonds. While historically considered less risky, factors such as economic downturns can impact issuers' ability to repay.

How Do I Know If Munis Are Right for Me?

Determine if munis align with your risk tolerance, tax situation, and investment goals. They suit conservative investors seeking regular income and tax advantages.

What Are Callable Bonds?

Callable bonds can be redeemed by the issuer before maturity at a specified call price. Investors in callable bonds should be aware of the risk of the bond being called if interests fall, potentially ending a favorable yield early.

Table Summary: Where to Buy Municipal Bonds

Final Thoughts

Exploring municipal bonds can offer attractive tax-free income and low-risk investment opportunities. Whether you choose to buy through a broker, online trading platform, or directly from the municipality, it's crucial to understand the types of bonds available and the factors that influence their performance. Consider consulting financial advisors for tailored advice about which municipal bonds best align with your investment strategy.

If you wish to delve deeper into bond investing or have related queries, consider exploring additional resources and articles on our website to enhance your understanding and achieve your financial goals.