Basics of Investing in Municipal Bonds

For risk-averse investors municipal bonds or “munis” offer a harbor in a storm of economic uncertainty and stock market volatility.

Muncipal bonds are typically backed by the tax raising ability of local or “muncipal governments”. They are usually issued to fund government projects such as road construction, waste water treatment plant construction, school construction and the like.

Unlike the investment portolio losses caused by recent stock market volatility investments in municipal bonds have offered a fixed, predictable income, usually with full or partially tax-exempt interest (especially important if the bonds are held outside of tax deferred IRAs), and a very low possibility of default. In other words, unlike investments in stocks or equities, your investment of principal – what you pay up front for municipal bonds – tends to be very secure.

When investing in municipal bonds it is important to research the demographics of a muncipality or city,  as well as its surrounding geographical area.  Investment risk can be a function of total population, population demographics (age and income),  diversity of the local economy (tax base, including both residential and commercial), and a history of on-time payments by the local government.

The minimum investment in muncipal bonds cant be very costly, often $5,000.

If you have the capital, the hard part is finding out where to buy them and if they are right for you.

Municipal bond traders and dealers must be registered with the Municipal Securities Rulemaking Board (MSRB). There over 2,500 registered dealers that are licensed to sell municipal bonds. They include bond dealers, banks, and nearly all full service brokerages.

Most major investment firms, such as RBC and Merrill Lynch, sell muncipal bonds.

Those who should invest in municipal bonds include those with high incomes and those who live  in States with higher income tax rates, such as California or New York.

Always ask your broker first for advice (make sure your dealer is registered wit the MSRB). Doe your best to assess all possible risks and understand the features of the bond. -Research the bond issue on your own to find the best prices and yields. Check websites like for price data.  Ask for legal documents like a prospectus that describes the security being offered and its terms.

By – Zania J. Faye