Municipal bonds are the bonds that are issued by the government entities that utilize the money to build highways, roads and schools. They are also known as state or local bonds that offer interest that is free from federal and state tax which is one of the outstanding features of municipal bonds.
Investors with high income earners find municipal bonds as a good investment since they are free of taxes.
There are two types of municipal bonds which are General Obligation bonds and revenue bonds. General obligation bonds are not secure and are backed by full credit and faith of the government that issues these bonds. They are considered to be the most safest municipal bonds.
Revenue bonds are not backed by full faith of the government like the general obligation bonds. These bonds are created by the states or cities in order to perform functions like operation of water system, bridges and tunnels. These bonds pay interest with the help of revenue that is generated by the projects.
Municipal bonds Types
Municipal bonds can be obtained in two ways. The first one is through the primary market. The second way is through the secondary market. The process of purchasing a new issue municipal bond is known as the retail order period. Purchasing a municipal bond from the primary market involves no fees. The only thing that you will be required to have is the bank account that leads the new issue. You will also be delivered a prospectus or document. The bonds are presented on a schedule that will consist of different yields and maturities. You can place a request with the investment representative about your bond coupon choice, the number of bonds and the maturity date. Generally the bond value is $1000.
The investors can buy municipal bonds from the secondary market where the bonds are already issued by other banks, investors, brokerage firms and bond dealers. Before purchasing bonds you require to open an account with the bank that deals with such bonds. You can either choose to work with an investment representative or find out the bond yourself that suits your needs and requirements. The price of the bond in the secondary market includes a markup.
You can also buy bonds from a third party bond dealer that include banks, online brokerage houses and brokerages. While purchasing municipal bonds it is advisable to invest a minimum amount of $5000. The brokers usually buy municipal bonds from licensed security dealers that own the actual bonds. There are many brokerage houses to look for when you plan to buy municipal bonds such as Scwhab, Merrill Lynch, Morgan Stanley, Edward Jones and E Trade.
These bonds mature at different rates. Some of them have a maturity date of 6 months while some others may have a maturity date of 50 years.