Q:

How do you buy municipal bonds?

A:

Quick Answer

Buy municipal bonds in the primary market from the investment brokers charged with underwriting and managing the offerings of states, cities, counties and other local entities authorized to issue the bonds. Investors can also purchase municipal bonds on the secondary market from another bond investor.

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Full Answer

Often called “munis,” municipal bonds function like a loan made to the issuing entity. In exchange for the loan, the issuer agrees to certain terms, such as a coupon rate and maturity date. The coupon rate simply means that the issuer promises to pay the investor a specified annual interest rate. Payments can be made quarterly or semiannually, The maturity date denotes the date the issuer agrees to pay back the principal amount and stop making interest payments.

Investors can purchase two types of municipal bonds: revenue bonds or general obligation bonds.

Municipalities issue revenue bonds to finance various infrastructure projects and repay the principal and interest with the income received from the projects. General obligation bonds typically cover expenses. The debts are repaid through the issuer's ability to levy and collect taxes.

Investors find municipal bonds attractive because of the tax exemption benefit. In addition, conservative investors who seek low risk investment alternatives often prefer munis because of the high probability of repayment.

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