Deal with a Broker
When you decide to buy municipal bonds, you’ll need a broker like GMS. GMS has been a leader in buying and selling municipal bonds since 1979, so put one of our muni bond specialists to work for you today. With the guidance of GMS, you can elevate your tax-free income objectives.
Choose Your Locality
First tell your broker what kinds of bonds you’re interested in. Because municipal bonds offer tax-free income in the municipality and sometimes the state where they are issued, you can narrow your choices to where you get the best exemptions from state and federal taxes in addition to municipal exemptions. For example, if you buy New York City municipals, the interest is free of local, state and federal tax. Puerto Rico and the Virgin Islands offer municipal bonds that have exempt interest for buyers from any state.
Tell your broker which municipality you are interested in.
Buy New or Buy Existing Municipal Bonds
New bonds often sell at face value, or par. Paying full price can be attractive if the interest rate is at a level you want and the bond is issued by a municipality that is in good financial shape. You’ll have both safety and income.
You might pay a premium--more than the face value of the bonds. You could do this when the interest rate is especially attractive, for example.
On the other hand, you may be able to get a discount on existing municipal bonds. This can happen when the interest rate isn’t as high as the rate on existing bonds. To make up for the lower income, you can pay a lower price.
Another reason for a discount could be that the bond is not rated as high as other bonds. Agencies such as Moody’s, Standard and Poor’s and Fitch rate bonds according to how credit-worthy they think the issuer is. If you buy a riskier bond, you can get a discount. You can also lose your money if the issuer defaults or goes bankrupt, so make sure you understand the risks.
Tell your broker whether you’re interested in new or existing bonds, or both. Then discuss the types of risk or safety you want.
Do Your Homework
You’re responsible for understanding risks, tax implications, your timeframe for holding a bond and any other considerations that can affect your investment. An organization called FINRA—the Financial Industry Regulatory Authority—has a checklist you can use for buying municipal bonds. This checklist helps you think through the issues related to buying municipal bonds, and find the best fit for you. Find the checklist here: http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/Bonds/p118925.