How to Buy Individual Municipal Bonds
Municipal bonds are issued by state and local governments and are available to individual investors either on the secondary bond market or as new issue securities. Munis (as they are sometimes called) pay a fixed annual sum called the "coupon rate" and can be redeemed at maturity for their par value. The bonds' prices vary as they are traded. For investors, the yield (coupon rate divided by the actual price) is more important than the percentage of the coupon rate. Regardless of the purchase price, bonds must be redeemed for par value at maturity.
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Instructions
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Open an account with a bond dealer who is registered with the Municipal Securities Rulemaking Board (MSRB). You also can open an account through most traditional or online brokerage houses, and with many banks. Check the MSRB listing at msrb.org (link below) to find registered bond dealers. The actual purchase of a municipal bond is as simple as picking up the phone and calling your broker or entering your order online.
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Look first for municipal bonds issued by your state or local government. Buying locally means that interest on the bonds will be exempt from state as well as federal taxes. You can purchase individual municipal bonds in any state, but if you aren't a resident you'll normally have to pay state income tax on earnings.
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Browse your bond dealer's inventory to find individual municipal bonds you may be interested in. When you buy a bond on the secondary market, the bond dealer sells you bonds he owns, or ones he has bought for you that were not in his inventory. Some bond dealers make their inventories available online to the public, but many restrict access to their inventory listing to account holders.
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Understand the pricing of municipal bonds. Price quotes are usually listed as percentages of the par value, not in dollar amounts. For example, a $5,000 muni selling for $5,200 would be quoted at 104.00 (104 percent par value). The price the bond dealer offers will include a markup to cover his costs (instead of adding a commission to the price). The price will also take into account any interest accrued since the last payment of interest on the bond.
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Evaluate the characteristics of any municipal bond before you invest. Credit risk is usually minimal, since defaults by state and local governments are very rare. To be safe, check the bond ratings for the issuer with a service like Standard & Poor's or Moody's. Keep in mind that if a municipal bond is selling at a premium above its par value, you will receive only the par amount when the bond matures
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Consider buying individual municipal bonds when they are first issued. Issuing governments generally have a "retail order period" for institutional investors before the bond offering. The retail order period is a window of one to two weeks in which individuals can purchase the bonds. One advantage of this is that there is no markup. The broker or bank you buy from gets only the underwriter's discount. Your bond dealer will let you know about upcoming new issues if you so request. (Dealers advertise new municipal bond issues as well, so you may not need to ask.)
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