How To Buy Municipal Bonds
For those interested in long term investing, it may be useful to know how to buy municipal bonds. Although the bond market doesn’t receive as much attention from the media as the stock market, they are generally considered to be more secure as an investment. Municipal bonds, which are certificates of debt, are owed to the bondholder by local governments. Use the following tips to help you decide which bond to buy, and how to buy it.
- Decide which bond you want using three key factors: maturity date, percent yield, and security. Municipal bonds work much like a regular loan, except the principal you lent the government is returned as a lump sum at the bond’s maturity date. You will usually collect interest payments according to the percent yield either annually or semi-annually. So, for instance, if you bought a bond with a 10 year maturity date and 10% yield for $1,000, you will collect $100 each year for the first nine years, and $1,100 on the tenth year. The final and perhaps most important factor in choosing a bond is security. If the local government you’re trying to buy from is running a huge deficit, you may run the risk of never getting your principal back.
- Buy municipal bonds from either the new issue market or the secondary market. Most experienced investors buy bonds based on a target for each of the three important factors instead of choosing a bond out of the blue. In the new issue municipal bond market, you buy the bond directly from the government that is issuing the debt. In the secondary municipal bond market, you are buying the bond from someone who already owns it. Since market rate, or percent yield, usually changes with time, the bond will either cost more or less than its face value. Either way, be sure to buy municipal bonds according to the target maturity date, percent yield, and security you’re looking for.
- To actually make the transaction, go through a bank or a broker. Unlike stocks, bonds aren’t sold on a huge exchange like the NYSE. Instead, they are sold through an over-the-counter market. Usually, licensed brokers are the easiest way to access this market. They can find bonds that meet your investment goals, and help you decide which ones to pick. By taking advantage of good municipal bonds, you can help to diversify your investment portfolio, both keeping your money safe and making it work for you.