The government or municipal requires money to undertake some major projects in the state and most times, the government or municipal may not have the funds to undertake such projects immediately. In order to raise money to fund these projects, they have to sell what is called municipal bond to the public or investors.
Table of Content
- What is a Municipal Bond?
- Why People Prefer to Invest in Municipal Bond to Other Bonds
- Long Term Safe Investment
- A Good Passive Income
- No Tax On Income to Internal Revenue Service
- 1. Ensure You Have Money to Invest till Maturity
- 2. Track Down Information on Available Bonds
- 3. Get a Stock Broker
- 4. Consider the Bond Rating
- 5. Check the Municipal Bond’s Credit Rating through Rating Agencies
- 6. Build Your Bond Portfolio
- 7. Buy Only Bonds With Insurance
What is a Municipal Bond?
A municipal bond is a security loan usually issued out by a municipality or government in order to raise money to finance major projects in the city or state; projects like building stadium, highways, schools, hospitals, water facility, health care facilities and other similar projects.
The municipality issue or sell the bond to investors, the investor or bond holder in exchange gives the municipality an agreed amount of money for a period of time; while the investor is paid a regular interest until the time the total amount is paid off. Most investors prefer to invest in municipal bond to investing in other types of bond like the Treasury bond, stocks and shares.
In this article, I will mention reasons why people prefer to invest in municipal bonds to other types of bonds and also how to buy municipal bonds.
Why People Prefer to Invest in Municipal Bond to Other Bonds
Long Term Safe Investment
Investing in municipal bond is the safest long term investment you can engage it depending on the time frame of the bond. Why? You may ask? The reason is because unlike shares and stock investment, your interest rate is stable and not affected by economy and the interest rate is also better than what you get from fixed deposit investment. Also, since most municipal bonds are insured; there is little or no risk on the investor.
A Good Passive Income
You invest in municipal bonds just once and get paid interest until the expiration of the bond agreement when the principal amount is paid off; this makes it a good source of passive income.
No Tax On Income to Internal Revenue Service
If you invest in treasury bond, you will be required to pay an income tax oh the interest you are paid. Likewise, if you invest in shares and stocks, you are required to pay capital gain tax on the profits you make from selling the stocks if the prize appreciated from when you bought the stock. But you are not required to pay income tax on municipal giving the opportunity to earn more money.
How to Buy Municipal Bond Online with High Interest Rate
1. Ensure You Have Money to Invest till Maturity
The first step to take is to set aside the amount of money you wish to invest in buying municipal bond. The least you can spend on buying a unit of municipal bonds is five thousand dollars. Secondly, invest only an amount that you wouldn’t need until the expiration of the bond agreement when the principal will be paid.
It is best to make this type of investment with your personal savings. You can consult your financial or account manager to get you an overall detail of your finances and advise on amount to invest in municipal bonds.
2. Track Down Information on Available Bonds
There are over twenty thousand municipal bonds available each year; both from the state and local government. Get information on available bonds. This can be gotten from business or finance section and columns of popular paper publications in the state. Note that not all bonds are proper to invest in.
The municipal bond transaction is an over the counter type of transaction and it is stock brokers that will help you purchase a municipal bond; so get a good stock broker that will help you purchase the bond. Remember to negotiate the broker’s service or transaction fee from the onset; most broker charge from 0.5 to 3 percent of the principal amount as their transaction fee.
4. Consider the Bond Rating
Each municipal bond comes with different interest rate; but what they all have in common is that the interest rate is fixed, so you should choose with high interest rate. Since the end result of every kind of investment is to make profits, it is best to maximize yours with the best interest rate available.
5. Check the Municipal Bond’s Credit Rating through Rating Agencies
There are some credit rating Agencies whose main duty is to analysis different municipal bonds and rate them according to municipals that has the ability to pay bond rates and principal in tune with the agreement. Always check the bond’s rating before you invest in the bond.
To build a municipal bond portfolio, you need to invest more money into buying more municipal bonds with different expiration dates, and reinvesting your interest into buying more bonds. If done well, you can achieve financial freedom few years from now. But it will all depend on the amount you have to invest, the interest rates of the municipal bonds you buy and how consistent the rates are paid.
7. Buy Only Bonds With Insurance
Most municipal bond come with an insurance coverage. The insurance is issued by debt security insurance firms and their duty is to give you guarantee that the interests and principal amount will be paid as at when due. That is why it is advisable to go for insured municipal bonds so that the insurance firm or company will be responsible for payment of your interest and principal if the municipal fails to pay up.
This insurance fee is paid by the broker and will likely lower your interest rate, but it is much better to get insured and earn smaller interest rate, than go for bigger interest rated bonds at your own risk.
So far, I have discussed reasons why people prefer investing in municipal to other types of bonds like Treasury bond and also provided tips on how to buy municipal bonds. As long as you go for municipal bond that have high credit ratings and are insured, this a good form of low risk investment.