I have heard for a long time that tax-free municipal bonds are an excellent investment and I am wondering about how to purchase some.
If for instance I have $100.00 in my pocket can I go to some office in the municipality and purchase that value in bonds or is there a minimum or does it depend on the bond?
If there is a minimum, can I go to some office in the municipality and purchase the bonds or must I go through some sort of broker and thereby pay a commission?
That’s basically the questions but any additional information along those lines would be of interest to me.
Generally speaking bonds have a face value of $1000 (and a price around that). You probably could buy into a municipal bound mutual fund with $100, though. Typically you could not buy a bond directly from a municipality. You’d have to find an existing bond holder to sell you one. That is what bond markets, online brokers, etc. are for.
Given the very basic nature of your questions, the low amount you wish to invest, and the fact that you did not even mention a tax bracket in your discussion, I would suggest that municipal bonds are probably not a wise investment for you.
I have a lot of experience with tax-free municipal bonds. In fact I’m buying an assload next week.
A typical bond is $5,000, and they cannot be bought as fractional shares. You could buy into a tax-free municipal bond fund in theory, but most that I know of require at least $2,500 minimum investment.
You can buy them through a broker or via online brokerage services. An individual, unless you have several tens of millions of dollars of assets, cannot deal directly with a municipality. You are pretty much doomed to paying a commission, the question is how much.
Bonds have two components to their effective rate of return. First, the coupon (purchase price) can be higher or lower than face value. Second of course is the bond interest itself.
It’s a myth that municipal bonds “lock you in” to a long-term investment. True the maturity dates are typically 10-30 years out, but that doesn’t mean you can’t sell them at any time. At least 6 of the 7 bonds issuances we own are currently selling for well over face value. One bond we have is selling for 10% over face value because it’s a muni which is also insured, paying 5% interest, state and federal tax free, and AMT-free as well. Holy crap that was a good buy…
This may be obvious, but just because a municipal bond is a “municipal bond” does not necessarily mean it’s state or federal tax free. You should always get the CUSIP (ID#) and download the descriptive memorandum from this site: http://emma.msrb.org/ Note too that if you, say, live in Texas and buy a state and federal tax-free Oklahoma bond, you still have to pay Texas taxes on it. An amazingly large number of people “forget” this, and get fucked in an audit.
Note too that a “municipal bond” may have nothing to do with a municipality. The safest bonds are ones which are 1) backed by an authority which can raise taxes, and 2) insured. Since the economy was fucked it’s much harder to find insured bonds which are decent. For example, last week my broker tried to sell me hospital bonds - state and federal tax free - but they were not only uninsured, but upon downloading and reading the fine print it was clear that they 1) had no authority to raise revenue to pay off the bond should they have financial problems, and 2) there was no mortgage on the hospital applied to the bond. So it was basically an unsecured loan to a hospital. Not my cup of risk…I go for bonds issued only by cities, counties, or states, where if they get in trouble in theory they could at least raise taxes rather than default on the bonds.
Current rates seem to be running about 3-4% for most decent bonds, but your mileage will vary tremendously.
If you open an account at Vanguard and buy their municipal bond funds (minimum $3,000), you will pay no commission. The funds themselves have expenses - typically 0.2% per annum unless you have $50k to invest, when you can lower the fee to 0.12%
What I mean is in most cases you are paying a commission, it’s just built into the cost and invisible. For example - that hospital bond I mentioned was issued with a face value of $5,000, but sold at a 98.5-cent coupon to the brokers. If the brokers turn around and sell it to you for $5,000, you still are effectively paying a 1.5% commission which is hidden within it. You don’t see it because you pay $5,000 and get $5,000 when it matures (or is called) - but if your broker bought it to hold, they would buy it for $4,925 and sell it at maturity or call for $5,000.
I was not intending to contradict you. There are trading costs “hidden” within most types of fund. However, if you buy a fund you get the full NAV of the fund at time of purchase (assuming no-load, which the Vanguard ones are), whereas if you buy individual bonds, you will pay a commission there and then. At the end of the day, maybe they end up being the same (or maybe Vanguard fund managers can get a better deal than the individual).
It sounds like the OP is talking about relatively small amounts of money (although we cannot be sure), in which case s/he should be looking at funds rather than individual bonds for diversification reasons.
While you’re perusing http//emma.msrb.org/ – be sure to read the general educational materials there, which are excellent. Pay particular attention to understanding the difference between the interest rate (sometimes nicknamed the “coupon” for historical reasons) and the yield. You’re shopping for the best yield, commensurate with the risk level you want. Bonds that have a fabulous yield often come with very high risks!
I work in this field, and will note that while the vast majority of muni bonds are issued with a minimum denomination of $5000, there are still small municipalities that do a direct issuance and sale, not using a broker-dealer firm to underwrite (offer them to the public.) A friend of mine subscribed to a local issue about six months ago by going down to the town hall and putting her name on a list of purchasers for bonds issued in minimum denominations of $1000. The issue was oversubscribed and she wound up not getting one.
If your investment size is in hundreds of dollars rather than thousands, perhaps you should ask yourself whether you actually have an effective federal tax rate high enough to make muni bonds attractive to you. If you only pay 21% to the feds, a muni bond is not as good a deal as it is for somebody richer who pays 31% to the feds.
If you have a broker, for Pete’s sake talk to him or her. If your personal broker doesn’t understand bonds, ask if someone at the firm can advise you before you decide what to buy. And once again, check that website: it likely has a copy of the original Official Statement (full of dense legalese but often the really important stuff is either on the front cover or in a section called Bondholder’s Risks). You should also find the most recent financial information about the issuer or other entity that’s supposed to pay you your interest and principal–AND any recent significant events. Think “bonds which pay off with property taxes.” Then think “floods of 2011 wiped out half of the town.” You wanna know, right?
That Meredith Whitney stuff? Unfounded. Incorrect. Municipal bonds in default at the end of 2011 amounted to 0.065% of total outstanding municipal bonds. (Muni Commentary, Bank of America/Merrill Lynch–not where I work.) Not even close to her wacky predictions.
Indeed there are. I’m a broker, believe it or not, and while I can’t try and conduct any sales in this forum (not SDMB rules but FINRA) I can say that muni bonds typically go in one damn hurry if they’re any good.
While you can go through a commission free broker there’s almost always a commission built in. What Una described earlier about dealer discounts also applies to me and my firm. So it works out about even in my experience. What might be different is the availability of bonds. Depending on the underwriter and the syndicate involved only certain dealers may get access to bonds or bonds could be on the market because a holder with an account at my firm wants to sell and our clients have priority, typically because the home office buys them and places them into availability.
Let’s see…
Using my BondNet access for my home state I see only 7 available tax free munis right now only one of which has an available inventory greater than 170k. Rates range between 3.0 and 4.75. That 4.75 is selling at an 8.27% premium right now. I don’t know if these same bonds would be available through a competitor.
Any other questions I’ll be glad to answer if I can.
Thanks, everyone. For some reason I didn’t think this through very well. Apparently I was thinking of municipal bonds as some sort of pot where you deposited money and received a receipt which you could cash in later rather that something similar to a stock certificate which has varying value.
Don’t feel like you’re alone. Tax-free municipal bonds are something which IMO are a fantastic investment but which a lot of folks really have no idea about the mechanics of. Since my co-workers know I have a very large private investment portfolio I often get questions from them on the subject.
…and no one has ever been convinced of the advantages. A typical response I get, no bullshit, is “4% tax free and backed by the state/city and you might be stuck with it for 15 years?” That’s too risky and too low! All I want is something totally safe with a guaranteed rate of return of 10-12% or more that I’m not locked into for more than 6 months! That’s what my retirement planning app on my iPhone says I should be looking for! Municipal bonds are gay!" :rolleyes:
In my life my investment portfolio has always been heavily focused on investments that have some payment feature. Various types of trusts (Canadian income trusts, REITs, commodity trusts, utility companies that issue consistent dividends), and bonds (including some munis.) These investments don’t have the sexiness in capital appreciation as the larger equities market, but there is something to be said for investment that generate a real income stream right from the beginning, which itself can be reinvested.