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How to Buy Muni Bonds: What Every Investor Should Know

Thursday, Jan 28, 2016

The municipal bond market offers a unique set of advantages that cannot be found elsewhere. What stops many investors from utilizing this highly attractive market is simply not knowing how to buy muni bonds. As with any investment, entering the muni bond market is a relatively straightforward process. However, clearly understanding the process and using the guidance of an experienced bond specialist to make the optimal selection is the key to successfully investing in municipal bonds.

Getting Started with Muni Bond Investment

The first step of buying municipal bonds is to determine the locality that you are interested in purchasing bonds from and to connect with an established broker. A municipal bond firm, such as The GMS Group, acts to buy or sell the bonds. Our bond specialists can discuss different locality options if you are unsure about which to start with.

Muni Bond Buying Basics

Municipal bonds can be purchased in increments of $5,000 or more. When an investor purchases a muni bond, they are essentially loaning a state, city, county, or other government entity money in order to provide utility services, build facilities, fund public projects, or meet other financial responsibilities. The municipality that issues the loan agrees to pay it back, along with interest, until a set date, known as the maturity date. An investor can purchase a newly issued bond or a bond that has already been on the market and is set to mature on a specified future date.

Important Terms in the Municipal Bond Market

The municipal bond market is complex. Understanding a few fundamental terms will help to demystify the core process of how to buy muni bonds.

  • Coupon – A bond’s coupon is the annual rate of interest paid on a bond. It is determined when the bond is issued and it never changes. For example, with a $10,000 bond with a 5 percent coupon, an investor will receive $500 a year, generally paid in semi-annual increments ($250 twice a year).
  • Yield – The yield is the annual rate of return, based on the purchase price, its coupon rate and the length of time to be held, expressed as a percentage. The yield on a municipal bond moves inversely to the market price.
  • Yield-to-maturity – If an investor were to hold a muni bond until maturity, the yield-to-maturity would be the total amount of interest earned plus the principal with interest compounded semi-annually at the stated yield.
  • Par value – Also known as the face value, the par value is the amount that the bond was originally issued for and the principal that has to be returned to the bondholder upon maturity.
  • Premium and discount bonds – On the market, a bond will sell above or below the par value as interest rates fluctuate. Premium bonds sell above par value while discount bonds sell below it.

Research Before Buying

As with any investment, it is important to do some research so that you understand the risks and tax implications of a municipal bond investment. Compare different options for their creditworthiness by researching bonds through independent bond rating agencies like Moody’s or Standard & Poor’s. Consider which combination of risk, yield, and length to maturity is right for you.

Ready to begin the process of buying municipal bonds? Our experienced specialists at The GMS Group can help you determine what types of muni bonds can help you strive to meet your financial goals, contact us or call 877-467-0070.