Investors can choose from many types of municipal bonds. Municipal bonds are issued by city, county and state governments to obtain resources and financing for government projects, like highway construction, new schools and public building renovations or construction. If you know how to buy municipal bonds and how they might fit in your investment portfolio, it will be easier for you to sort through your options.
Why should I invest in municipal bonds?
Municipal bonds are enticing to investors for many reasons. First, they have a relatively low purchase price. They are also generally discounted due to the relative risk associated with purchasing municipal bonds that are issued by governmental entities that may experience fiscal problems. The most appealing aspect of any type of municipal bond, however, is that they are exempt from federal income tax. Furthermore, if the investor lives in the same state as the governmental entity that issued the bond, the investor is usually exempt from state tax as well. However, some municipal bonds are considered taxable, and you may have to pay taxes on them if you are hit by the alternative minimum tax, so you will need to consider the individual bond and your situation.
Which bonds can I choose?
The types of municipal bonds include general obligation bonds, revenue bonds and industrial development bonds. General obligation bonds are backed by the governmental entity's ability to collect taxes. They are issued to pay for such projects as sewer systems and school renovations. Revenue bonds, however, are backed not by the entity's taxing authority but by a specified tax or by the revenue generated from the business backing the project or obligation. Industrial development bonds support the issuing entity's purchase or construction of an industrial facility that the entity intends to lease to a business or private corporation. The entity uses the fees generated through the lease to pay for the purchase of construction as well as to pay the bond.
How can I buy municipal bonds?
Given the positive investment opportunities associated with their purchase, many investors wonder how to buy municipal bonds. Thousands of governmental entities issue municipal bonds each year with bond projects numbering in the millions. Investors can monitor prices and rates of the larger municipal bonds through financial websites and in the financial sections of major newspapers. You can buy municipal bonds through an investment broker.
When purchasing a municipal bond, however, be aware of municipal bond rates. Municipal bond rates are composed of a letter system that correlates to the relative security of the investment, with an AAA rating being the most secure. Municipal bonds with a rating of BB or better are generally considered to be secure investments.
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