Municipal bonds (or munis) are an investor's dream because the income earned from the interest paid is exempt from federal (and sometimes state) income taxes. But more than just another financial instrument, municipal bonds help city and county governments pay for much-needed improvement projects for real-world infrastructure like roads and bridges, sewer maintenance, even new schools.
Before deciding to buy municipal bonds, perform a municipal bond search on the Internet to:
1. Make sure you know what, if any, municipal bond tax applies to the interest earned and any transaction costs involved when you buy municipal bonds.
2. Learn about the issuer and the issue the bond is being used to fund.
3. Check recent transaction prices to make sure you're getting a good price for the bond.
4. Find out whether or not the muni bond is insured.
Action Steps
The best contacts and resources to help you get it done
Do your research on muni bonds
More than 50,000 state and local entities issue bonds for over 2 million bond issues. Daily trading is estimated at $11 billion. Overall, more than $1.5 trillion worth of municipal bonds are in the hands of investors. Some are traded while others are held until they mature. There's a lot to know before investing.
I recommend: Read the entry on muni bonds at
InvestinginBonds.com, a website run by the Securities Industry and Financial Markets Association. It provides a basic background to the considerations involved in buying muni bonds online.
BondsOnline, run by Twenty-First Century Municipals Inc., is an online information-services company that features news about the fixed income market, as well as price quotes and research reports.
Consider a municipal bond fund
Whether or not to buy bonds individually or invest in a municipal bond fund is a matter of debate among financial planners. Individual bonds can provide an investor with freedom and autonomy in controlling his or her own portfolio. Funds, on the other hand, can provide investors with diversity, liquidity and lower trading costs, all in addition to a professional manager who can decide when it's okay to buy slightly lower-grade bonds to get higher yields.
I recommend: Investigate some of the fund management firms like
Fidelity or
Wells Fargo. They offer a broad variety of funds that could assist you in your municipal bond search.
Protect your municipal bond portfolios
Municipal bond insurance guarantees that you, the holder, receive your interest payment if the bond issuer defaults. Coverage is generally good for the life of the bond and can't be cancelled by the insurer. Only municipal bonds with credit ratings of BBB or higher are typically insured. Policies can also be taken out on municipal bond funds.
I recommend: Read up at
WM Financial Strategies about the process by which bond insurance is issued to make sure you know the details. But consider carefully whether insurance is really necessary. Recent developments in rating agency methods, as discussed at
Seeking Alpha, are trending toward rating municipal bonds with the same method used to assess corporate bonds. If this continues, there's a good chance more municipal bond issuances will win AAA scores, which would essentially cancel out the need for insurance.
Tips & Tactics
Helpful advice for making the most of this Guide
- Make sure any municipal bond you buy is issued by a municipality with: 1) a population of 10,000 or more; 2) a diverse economy; and 3) a history of punctual payment on past obligations.
The official source of Municipal Bonds is the Municipal Bonds page at Business.com
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