Where Do I Buy Municipal Bonds? A Breakdown of Options
Understand the different channels and processes for acquiring municipal bonds, including brokerage platforms, dedicated funds, and direct issuer access.
Municipal bonds are debt securities issued by state and local governments to finance public projects such as schools, highways, and other infrastructure improvements. Bondholders receive regular interest payments, typically semi-annually, and the original principal is repaid at the bond’s maturity date. Interest income from municipal bonds is generally exempt from federal income tax. For residents of the state where the bond was issued, this interest may also be exempt from state and local income taxes.
Purchasing Through Brokerage Firms
Individual investors commonly acquire municipal bonds through brokerage firms, which offer access to a broad selection of these securities. These firms vary by service level: full-service brokers provide comprehensive advice, discount brokers focus on trade execution, and online platforms cater to self-directed investors with research tools.
Before purchasing bonds, an investor must open a brokerage account. This involves providing personal identification and financial details, including employment status, annual income, and net worth, to assess investment suitability and comply with “Know Your Customer” (KYC) regulations. Verification requires a government-issued photo ID and proof of address. Once the account is established and funded, investors gain access to a wide inventory of municipal bonds available in the secondary market, and sometimes new issues in the primary market through the firm’s underwriting desks.
Investing via Municipal Bond Funds and ETFs
An alternative to individual bonds is investing in municipal bond mutual funds and exchange-traded funds (ETFs). These professionally managed investment vehicles pool money from many investors to purchase a diversified portfolio of municipal bonds, offering broader diversification than purchasing individual bonds alone.
Investors buy shares of these funds or ETFs, which represent a proportionate ownership in the underlying bond portfolio. These funds come in various types, including national municipal bond funds, which invest across different states, and state-specific municipal bond funds, which focus on bonds issued within a particular state. Funds may also be categorized by the maturity length of their holdings, such as short-term, intermediate-term, or long-term municipal bond funds.
Direct Purchase from Issuers
Purchasing municipal bonds directly from the issuing government entity is less common for individual investors. This typically occurs in the primary market when new bonds are initially offered. Larger municipalities may occasionally offer direct purchase programs for retail investors, but these opportunities are not widely available.
Participation in direct purchases often involves competitive bids or negotiated sales, frequently facilitated by an underwriting syndicate. This method is more challenging for individual investors compared to using a brokerage firm. The direct channel primarily serves institutional investors or those with significant capital and specialized knowledge.
Understanding the Purchase Process
After establishing a brokerage account, acquiring an individual municipal bond involves several steps, beginning with information gathering. Investors should identify a bond by its CUSIP number, a unique nine-character alphanumeric code. Understanding key bond characteristics is important, including the maturity date, which is when the principal is repaid, and the coupon rate, representing the annual interest rate paid by the issuer. Investors also evaluate the yield-to-maturity (YTM) or yield-to-call (YTC) if the bond has a call feature, allowing the issuer to redeem it before maturity.
Credit quality is assessed through ratings from agencies like Moody’s, S&P Global, and Fitch Ratings. These ratings indicate the issuer’s ability to make timely interest and principal payments, with higher ratings generally signifying lower risk. The bond’s tax status should be confirmed; most municipal bonds offer federal tax exemption, but state and local tax treatment can vary, and some bonds may be subject to the Alternative Minimum Tax (AMT). Bond prices are typically quoted as a percentage of their par value, usually $1,000 or $5,000, indicating whether the bond is trading at par, a premium, or a discount. Brokerage platforms offer research tools and bond inventory screens to help investors filter bonds based on these criteria.
Once a suitable bond is identified, place the order through the brokerage platform. This involves inputting the bond’s CUSIP number, the desired quantity (in par value, typically $5,000 increments), and the type of order, such as a market order for immediate execution or a limit order to specify a maximum price. An immediate order confirmation is provided. The transaction then undergoes a settlement period, typically one to two business days (T+1 or T+2), during which funds and securities are exchanged. Finally, the investor receives a trade confirmation statement from the broker, detailing the purchase, including CUSIP, price, yield, and fees.