If you own a municipal bond, the issuer is in debt to you. When you buy a municipal bond, also called a muni, you lend money to the issuing government, which -- in turn -- promises to pay you interest. State and local governments use municipal bonds in the same way that the federal government uses savings bonds: to fund government projects. Municipal bonds represent a tax-free investment, which is typically at least $5,000. More than 8,000 municipalities issue munis as of the date of publication, making it possible in theory for you to own munis from all 50 states.
Establish an account with a brokerage licensed to buy and sell bonds from all 50 states. Compare commission prices or transaction fees and select a brokerage that best suits your needs.
Compare each muni bond’s coupon, maturity date, rating, price, amount and yield.
Deposit money into your brokerage account. Depending on the firm, you typically can deposit money by electronic funds transfer from a bank account, wire transfer or a check by mail.
Let the brokerage know that you’d like to buy a certain muni bond. Your broker will let you know how to buy the bonds or buy the bond for you, depending on the municipalities' policies.
- The coupon is the percent of interest you’ll receive on the bond twice a year.
- The maturity date is the date the bond matures, or when you can get your money back from the issuer.
- The rating on a muni bond ranges from AAA, which represents a high-quality rating, to C or D, depending on which grading scale you use. C or D ratings indicate that the issuer is late making interest payments.
- Typically, prices are listed as a decimal, and the decimal represents the price on the dollar. For example, a bond priced at 105.132 is $1,051.32 per $1,000, or $51.32 over the face value per $1,000.
- The amount indicates how many $1,000 bonds are sold together. If you’re looking at a bond that has an amount of 25, the bond’s face value is $25,000. The yield indicates the estimated yield-to-maturity rate, which is an estimate of the rate of return.
- You can buy muni bonds in a primary market or a secondary market. A primary market is the initial sale of the bond. The secondary market typically offers bonds that were already issued to investors but are available for purchase.
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