Municipal bonds or munis is basically a loan, that you give your municipal body by purchasing bonds issued by them. There a few factors to be considered while purchasing bonds like, maturity date, yield-to-maturity and yield-to-call. Read ahead to know more…
A municipality or state-run administration or county are grass root level public administration and governance bodies, that look after the well-being of a geographically smaller area. The area and population that come under the jurisdiction of a municipality are basically smaller than usual state and federal governments.
Being public administration bodies, such governments tend to make gigantic capital investments, in capital assets. That is projects such as building of roads or bridges tends to have a one time investment, which is gigantic. The recovery of the cost is pretty prolonged but assured as the revenue comes from the public, and since the amenity is of public demand, it is again assured. Thus, in short, the return on investment in case of municipal bonds is an assured deal. This makes municipal bonds one of the best investments.
About Municipal Bonds
The purpose of municipal bonds as mentioned above is simple, to facilitate the finding of huge public amenity projects. They work just like all other bonds, they have one time investment and term of period of maturity upon which, the investors are repaid the invested amount, plus the amount of interest that has been accrued on the principal amount. A person cannot withdraw the municipal bonds mid-term and in any case if they do so, the interest that has been accrued is lost completely.
In the United States, the market of municipal bonds is an over-the-counter market which is accessible through a network of broker-dealers. This market is governed by the Municipal Securities Rule Making Board, that also governs the authorized dealer brokers who deal in these bond investments. The minimum face value of a municipal bond tends to be $5,000.
This is the amount that an investor will receive upon the maturity of the bond and is known as the face value of the bond. However, the purchase value of such bonds is not $ 5,000. It is quite lower, because the standard municipal bonds are issued at a discounted rate.
Now, there can be different combination in the issue value of bonds. There are several bonds that are issued at face value, and the interest goes on accruing on them based upon the prescribed rate. When it comes to rates, there are two types that is floating rates and fixed rates. The fixed rates are standard ones that do not change. The floating rates however, change as per certain economic conditions, and especially as per the revenue that is being generated by the project.
How to Buy Municipal Bonds
The process of investing in municipal bonds is not that difficult, owing to the fact that the bonds market is an over the counter market, and you just have to approach a certain dealer in the market. A list of such dealers is available with the Municipal Securities Rule Making Board. The approach process that is used to finalize the municipal bonds is the difficult one.
- There are some simple steps, with the help of which you as an investor can finalize upon the municipal bond that would be apt for purchase. The first step is to call up your broker, and know the number of all the available bonds and the prices for which they are available. Note that all the prices will be market prices or the issue price (which is substantially less), plus getting all the other features of the securities is equally important.
- Next, you will have to assess three dimensions of the bond as per the budget that you have allocated for the purchase. Assess the price for which the bond is available, and then compare it with the yield. Of course the yield should be substantially more than the price. While making this comparison bear in mind the duration or term of the bond. The general rule of thumb is, longer the term of the bond, more is the yield.
- These bonds are also rated by some firms such as Moody’s, Standard & Poor’s, and Fitch Ratings Service. It goes without saying that better the rating, the better is the bond, i.e, it will give a better yield. The best municipal bonds usually have the AAA rating.
- The last part is analyzing the general features such as the investment destination of the bond and history, in case of those which are already issued bond (also known as a secondary market bond).
Buying such bonds is not a difficulty task, all you need to do is analyze properly. The analysis in itself is quite simple and straight forward. Apart from just being an investment, a municipal bond is also a widely accepted security against loans and credit, which possesses a very good liquidity. The taxability of municipal bonds is also low, which gives the investor an additional benefit.