how to buy municipal bonds

Municipal bonds Basics

Municipal bonds are debt securities issued by or on behalf of U.S. state and local governments, their agencies or authorities. These issuers sell bonds to fund either their general operations or specific projects, such as the construction of bridges or highways. The two main types of municipal bonds are general obligation bonds, and revenue bonds. general obligation bonds are municipal bonds secured by the full faith and credit of the issuer and usually supported by the issuer’s taxing power. Revenue bonds are secured by the charges tied to the use of the facilities financed by the bonds. For example, revenue bonds are issued to fund toll roads, bridges and water treatment facilities, among other projects, and are secured by the tolls or fees collected by these facilities

Municipal bonds has tax advantages. The interest income earned on most municipal bonds is exempt from federal income taxes. Interest payments are also generally exempt from state taxes if the owner of the bond resides within the state that issued the security, and the same rule applies to local taxes.

Municipal debt is also typically of high credit quality. More than 99% of rated municipal bonds carry investment-grade ratings from Moody’s Investors Service. Many municipal bonds are backed by insurance, in addition to the credit of the municipality or the revenues from the project being funded. If an insured municipal bond defaults, an insurance company should step in and make all principal and interest payments on the bond.

How to buy Municipal bonds

State and local governments that issue bonds must file notices of "material events," such as a ratings downgrade on a bond. Municipal bonds can be purchased directly from the entity that is issuing them: city governments, county governments, school districts, airports, and seaports.