How to Invest in Municipal Bonds

November 29, 2010 Bond Investing, Investing, Investing/Trading

An investor looking for a cash return on investment can invest in dividend stocks, bank CD’s, US treasuries, and bonds. Municipal bonds are an attractive investment for many and can be invested in by buying individual bonds, shares of bond funds, or shares of unit investment trusts. How to invest in municipal bonds may vary with how much money the investor has to invest. How to invest in municipal bonds may also have to do with the investor’s level of income. Tax free municipal bonds are typically more attractive to high income investors. A concern for those interested in municipal and a caution for how to invest in municipal bonds has to do with the creditworthiness of municipal pension obligation bonds.

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How to invest in municipal bonds may be to buy individual bonds through a stock broker. These are typically sold on the over the counter market and commonly are sold in denominations of $5,000 each. To the extent that an investor wants to invest in denominations he will need to look to other alternatives. How to invest in municipal bonds with smaller amounts of money is to invest in a bond fund or a unit investment trust. Successful municipal bond investing includes knowing how the price of bond varies with the prevailing interest rate. When the prevailing interest rate goes up the value of the bond goes down. Likewise when the prevailing rate goes down the value of the bond goes up. Although in investor will typically buy municipal bonds to enjoy the interest checks he may also buy municipal bonds in the expectation of interest rates going down in which case he can sell his bonds for a profit. Unlike investing in dividend stocks the underlying vehicle does not appreciate over time. When the bond matures the investor gets his money back and no more.

Unlike a bond fund a bond unit investment trust is set up with a chosen set of bonds. The bonds eventually expire. During the life of the trust the investor receives interest payments and at the end he receives his investment back. Like a bond fund a trust diversifies the risk of investing across several issuers of bonds. How to invest in municipal bonds in this case will be to pick a professional manager with a strong track record of setting up this sort of investment. The investor will not need to research individual bonds and will be a passive participant in the endeavor. However, shares in a bond unit investment trust can be bought and sold so that an investor can decide to leave the investment. As with individual bonds the investor may choose to sell his investment if interest rates drop and the value of his shares in the trust rises substantially. Although bonds do not generate the returns of a well chosen growth stock they are typically more stable than many stock investments. If such an investment is held to maturity, provided the issuer does not default, the investor gets his money back. A conservative approach to how to invest 10 000 dollars that one has just inherited may well include investing part in municipal bonds.