How to invest in municipal bonds

Municipal bonds are investments bonds that are issued by the municipal authority, local government or by the city either directly to the public or via agencies. They are issued by the municipality in order to raise money to finance public works projects as well as infrastructure development. This article highlights on how to invest in municipal bonds.

How to invest

It is important to get bond market news first such as municipal bond types, maturity period, municipal bond ratings and prices as well as how to buy municipal bonds before investing. This will involve purchasing the bond at a fixed interest rate or variable interest rate which may be subject to the maximum legal limit. The municipality promises to pay back the money to the investor after a period of time at the agreed interest rate.
The bond repayment plan The bond repayment plan depends on the agreed terms which can be annual or semi-annual. However, most short-term bonds pay interest at maturity, while long-term bonds are amortised through annual principal payments.
The bondholder gets an investment certificate which stipulates his interests as well as the terms and conditions of the bond.

Who issue municipal bonds?

Municipal bonds are issued by the cities, school and special-purpose districts, any other government entity below the state and public utility districts.

Advantages of investing in Municipal bonds

Low risk Municipal bonds have a low investment risk because they are secured by municipal or local government assets, revenue from public utilities or income from tax, therefore the probability of payment default on maturity is very low.
Suitable for risk averse investors They are suitable to risk averse investors who are sensitive in terms of the risks associated with their investments. These investors worry much on the security of their investments rather than the return, hence their decision of investing in municipal bonds. Free to trade
Municipal bonds are free to trade at any time once they are acquired by an investor. The bonds can be re-traded freely without any restrictions to time or investor.
Tax exemption Municipal bonds are tax-free bonds, thus investors are exempted from tax such as the federal income tax and state income tax except bonds that are issued for a certain purpose.

Disadvantages

Low returns
Municipal bonds have a low investment return as compared to other investment vehicles like money markets and stocks.