What Are Municipal Bonds?
A municipal bond, sometimes called a muni bond, is a debt security issued by a state, county, city, or other political entity (such as a school district) to raise public funds for special projects. The income from municipal bonds is normally exempt from federal income taxes. It may also be exempt from state income taxes in the state in which the municipal bond is issued.
Municipal bonds are generally a low-risk investment, but still are subject to a variety of risks, including default risk, market risk (adjustments in interest rates), and call risk. If you buy a bond and hold it to maturity, market risk is not a factor since your principal will be returned in full at maturity. Some municipal bonds may be subject to the federal alternative minimum tax. When interest rates rise, bond prices generally will fall. Certain municipal bonds may be difficult to sell. A municipal bond issuer may be unable to make interest or principal payments, which may lead to the issuer defaulting on the bond. If this occurs, the municipal bond may have little or no value. If a bond is purchased at a premium, it may result in realized losses. It’s possible that the interest on a municipal bond may be determined to be taxable after purchase.
How do Municipal Bonds Work?
When you buy a municipal bond, you’re essentially loaning money to the issuer in exchange for interest payments over a certain period of time. When the bond reaches maturity, the full amount of your original investment is then returned to you.
What is a Municipal Bond ETF?
A municipal bond ETF is similar to a traditional ETF, but provides investors with access to the municipal bond market and the investments are held primarily in municipal bonds.
How to Invest in Municipal Bonds
There are many different routes you can take when you decide you’d like to invest in municipal bonds.
Some common ways to invest in a Municipal Bond are to:
- Use a broker or bank that has a municipal securities dealer or department.
- Hire an investment advisor who can locate and trade bonds on your behalf.
- Trade directly online through a self-managed account.
- Buy or sell shares in a mutual fund.
- Buy or sell shares in an ETF.