Where to Purchase Municipal Bonds

Understanding Municipal Bonds

Municipal bonds, often referred to as "munis," are debt securities issued by local government entities, including states, cities, counties, and other government subdivisions. These bonds are used to fund public projects such as building schools, highways, or sewers. Because they are typically tax-exempt, municipal bonds are considered an attractive investment, especially for investors in higher tax brackets seeking tax-free interest income. Understanding why and where to buy these bonds is crucial for a prosperous investment strategy.

Benefits of Municipal Bonds

• Tax Advantages: One of the most significant benefits of municipal bonds is their interest earnings, which are often exempt from federal income taxes. In many cases, if you reside in the state where the bond was issued, the interest may also be exempt from state and local taxes.
• Risk Mitigation: Generally, municipal bonds are considered a lower-risk investment compared to stocks and corporate bonds, as they are backed by the taxing power of the issuing municipality.
• Steady Income: Munis provide a predictable stream of income through periodic interest payments, making them appealing to income-focused investors.

Where You Can Purchase Municipal Bonds

Investors have several avenues when considering the purchase of municipal bonds, each with its set of benefits and considerations. Here’s a comprehensive look at these options:

1. Brokerage Firms

Brokerage firms, both full-service and discount, are one of the most common places to purchase municipal bonds. Full-service brokers provide personalized service and advice, while discount brokers offer a more self-service model with lower fees.

• Full-Service Brokers:

  • Provide personalized investment advice.
  • Help build a diversified portfolio, including municipal bonds.
  • Charge higher fees or commissions.

• Discount Brokers:

  • Allow investors to buy municipal bonds online at reduced fees.
  • Require investors to conduct their own research.
  • Examples include Charles Schwab, Fidelity, and TD Ameritrade.

2. Investment Banks

Some large investment banks also deal directly in municipal bonds through bond desks or municipal bond departments. They typically cater to institutional investors but may also offer individuals access to bonds as part of a larger portfolio management strategy.

3. Bank Trust Departments

Local or regional banks' trust departments sometimes handle municipal bond transactions for their clients, especially in cases where there is a long-standing relationship and the client has a significant portfolio.

4. Municipal Bond Funds

For investors seeking diversification and professional management without buying individual bonds, municipal bond funds serve as an excellent option.

• Mutual Funds: These funds pool money from investors to purchase a diversified portfolio of municipal bonds.
• Exchange-Traded Funds (ETFs): Similar to mutual funds but traded like stocks on exchanges, offering greater flexibility.

5. Direct Purchases from Issuers

Some municipalities allow investors to purchase bonds directly. This can be advantageous in terms of minimizing brokerage fees. However, this method often requires investors to manage their own research and due diligence.

6. Online Platforms

Numerous online platforms offer municipal bond trading services, allowing investors to screen and purchase bonds directly. These platforms include tools and resources to evaluate bond credit ratings and yields. Examples include:

• BondDesk: Offers a marketplace for retail investors to purchase bonds online.
• Investing in Bonds: Provides a robust database for researching and buying bonds.

Factors to Consider When Purchasing Municipal Bonds

When deciding where to purchase municipal bonds, investors should consider several factors to optimize their investment outcomes:

Evaluating Creditworthiness

Municipal bonds are rated by credit rating agencies such as Moody's, S&P Global, and Fitch Ratings. Higher-rated bonds are considered safer but typically offer lower yields compared to lower-rated "junk" bonds, which carry higher risk.

Interest Rate Environment

Interest rates inversely affect bond prices. When interest rates rise, existing bond prices tend to fall, and vice versa. Understanding the current and projected interest rate environment is crucial when investing in bonds.

Tax Status

Verify the tax status of interest payments, which can vary depending on whether the bonds are general obligation bonds or revenue bonds:

• General Obligation Bonds: Backed by the full faith and credit of the issuing municipality and often tax-exempt.
• Revenue Bonds: Secured by specific revenue sources like tolls or utility fees, and their tax status can vary.

Duration and Maturity

Consider the bond's maturity date, which indicates how long you’ll be receiving interest payments before the principal is returned. Longer maturities often offer higher yields but come with increased interest rate risk.

Default Risk

While municipal bonds are generally low-risk, they are not completely free of default risk. Research the municipality's fiscal health to mitigate this risk.

Making the Purchase

Here’s a step-by-step guide on purchasing municipal bonds through a brokerage platform:

1. Open a Brokerage Account: Choose a full-service or discount broker based on your need for advice and the fees you are willing to pay.

2. Research Bonds: Use the brokerage’s tools to research available municipal bonds, paying attention to yield, credit ratings, and duration.

3. Evaluate Costs: Understand the commission and fees involved in purchasing the bond. Transaction costs can vary widely among brokers.

4. Place the Order: Once you’ve selected a bond, place an order through your broker. Orders can typically be modified or canceled before execution.

5. Monitor Investments: After purchasing, regularly review your bond's credit ratings and the municipality's financial health to ensure your investment is still sound.

Frequently Asked Questions (FAQs)

Are municipal bonds risk-free?

No investment is entirely risk-free. While municipal bonds are generally low-risk, they are subject to interest rate changes, credit risk, and, in rare instances, default risk.

How do I know if a municipal bond is tax-exempt?

The issuing municipality will typically make the tax status clear in the bond's offering statement. Consult this document or speak with a financial advisor to confirm.

Can I sell municipal bonds before they mature?

Yes, municipal bonds can be sold on the secondary market if you need to liquidate your investment. However, market conditions at the time of sale will affect the price you receive.

Should I invest in individual bonds or bond funds?

It depends. Individual bonds offer a predictable income but require due diligence, while municipal bond funds provide diversification and professional management.

Concluding Thoughts

Municipal bonds present a compelling investment avenue for those seeking tax-free income and relatively low risk. Whether you opt for individual bonds through a brokerage or invest in a municipal bond fund, understanding the process and underlying risks is crucial. Leverage the strengths of your chosen platform wisely, and remain informed to ensure your investments align with your financial goals. For further exploration of investment opportunities that might complement your portfolio, consider reviewing related content available on our website.