How to Buy a Municipal Bond

Some brokers specialize in municipal bonds and offer more alternatives for investors.

Municipal bonds are issued by state and local governments. The proceeds from a municipal bond issue can be used to fund projects such as schools or roads. Municipal bonds are attractive to investors because the interest earned on them is tax free. If you buy municipal bonds issued in your home state, the interest will be state income tax free as well.

Instructions

1. Call or go into the offices of several brokerage firms and larger banks in your area and ask if they sell municipal bonds. When you find dealers willing to discuss bonds -- and not trying to steer you into mutual funds or asset management accounts -- ask if they maintain an inventory of bonds from your state. Good bond dealers tend to specialize in their local area and will have an inventory of municipal bonds from local government entities for sale.

2. Discuss with an investment representative from the dealer or broker the type of municipal bond your want to buy. Major considerations are the term of the bond, how much you want to invest and the credit rating of the bond or issuer. Municipal bonds can have terms up to 30 years; longer term bonds pay higher rates. Lower rated bonds will pay higher interest with a higher possibility of default. For example, an A-rated bond will have a higher yield than a AAA-rated bond. Municipal bonds are purchased in multiples of $5,000.

3. Review the available bond choices. A good bond dealer will offer several bonds meeting your investment criteria.

4. Select the bond you want, complete the necessary paperwork with the investment representative and pay for the bond. Paperwork includes the forms required to open an account with the broker and disclosure forms about your financial situation. An investment representative is required understand a customer's financial status when making investment recommendations.

Tips & Warnings

• Bond dealers usually make their money by increasing the price of the bond from the dealer's cost. This is called marking up the bond. The investment rep will disclose any commissions but will not reveal the amount of mark up.

• The minimum purchase size for municipal bonds is $5,000 in face value. The market price of the bond may be higher or lower than the face value, depending on the bond's rate of interest and current market rates.

• If you are looking for a particular bond, the dealer's bond desk will call their contacts to find the bond. Finding a particular municipal bond may take several days.

• It may be difficult to get a good price for a municipal bond if you want to sell, especially if the face value is less than $100,000. Plan on holding your municipal bond until it matures.

References

• Municipalbonds.com: How to Buy Municipal Bonds