Buy Municipal Bonds
How to Buy Municipal Bonds
There are two ways to buy municipal bonds. The first way is through the primary market when a bond is issued. The second, more common, is through the secondary market after the bonds have already been issued. Since the secondary market is the most prevalent channel for municipal bond investing, we will focus here.
Who to go to when Buying Municipal Bonds
When you purchase municipal bonds, individually, you can easily go through any third party bond dealer. Commonly, these are banks, brokerages and online brokerage houses. Be prepared to invest a minimum of $5000 U.S. when buying municipal bonds. Unlike other forms of investing, municipal bond investing is an “over-the-counter” market and as such there is no consolidated exchange. The brokers purchase municipal bonds from securities dealers that are licensed and who own the actual bonds. When you plan to buy municipal bonds, you can look to any of the major brokerage houses such as E*Trade, Scwhab, Smith Barney, Merrill Lynch, Edward Jones and Morgan Stanley.
Length of Maturity
Municipal bonds mature at different rates. Some can have as small a maturity date as 6-months others can be up to 50 years. For the most part, a municipal bond investing strategy should be based on long-term financial goals. These goals will depend upon your date of retirement and the amount of wealth you would like to accrue.
There is one caveat to the maturity date of a bond, though. The issuer of the municipal bonds will generally have the right to pay the bond back early, also known as a callable municipal bond. These bonds will have call dates listed on them that occur between when you purchase the bond and the bond’s actual maturity date. If a bond is called, you will receive your initial investment back and will need to find a new place to invest that money.
Accrued Interest on Secondary Market Municipal Bonds
When purchasing municipal bonds, you will need to keep in mind that the brokerage firm selling you the bond will require that the accrued interest (from the date of the last interest payment) on the bond be paid by you. This isn’t a bad thing, though, as you will be receiving the full coupon on the next interest payment date.
Types of Municipal Bonds
There are two types of municipal bonds: general obligation and revenue. General obligation bonds are backed by the taxation powers of the government agency that is issuing the bonds. This allows the government to be able to use any form of taxation available in order to pay back the bonds. Revenue bonds, on the other hand, are connected with one source of revenue. For instance, trash service. If a bond is associated with the trash service of a city, then that bond can only be paid back with revenue received from this source.
The final thing to consider when buying municipal bonds is the yield. You will be paid interest on the bond every six-months, which, depending upon the percentage rate and the amount of the bond, can be quite nice. But the overall payment at maturity is called the yield. If this is less than your purchase price, your overall return will end up being less, even with the interest payments.
<< Part 1: Municipal Bonds Overview
<< Part 2: Municipal Bond Funds