Municipal Bonds Pay Varying Rates — Here's How To Buy Them

Municipal bonds, also known as munis, are debt securities issued by local governments or their agencies to finance public projects. For this reason, there are many types of municipal bonds you can invest in. 

Here are the two primary types of municipal bonds:

• General obligation bonds: These are issued by state and local governments and are not secured by any specific assets. Their repayment relies on the issuer’s credit and taxing authority.
• Revenue bonds: These bonds are funded by specific project revenue, like tolls or lease fees, and not by the government’s taxing power. They can be nonrecourse, meaning bondholders have no claim on the revenue source if the funds dry up.

Don't Miss:

• This brokerage offers custom rewards for users to switch – the biggest reward so far for 1 user is $19,977.48. Will yours beat it?
• Online brokerages make ungodly amounts by selling your data. What trading platform doesn’t sell your data to market makers?

What Do Municipal Bonds Pay?

AAA-rated municipal bonds are considered the highest quality with the lowest risk of default, reflecting the strong financial health of the issuer. 

AA-rated bonds are also high-quality but with slightly higher risk compared to AAA bonds, indicating strong, but not the strongest, creditworthiness. 

A-rated bonds are a tier lower, still representing good credit quality but with more risk than AAA and AA bonds, suggesting some vulnerabilities in the issuer’s financial profile. 

The ratings indicate the issuer’s ability to meet financial commitments, with higher ratings generally meaning lower interest rates.

The two primary factors impacting municipal bond rates are the rating and maturity range. 

For example, a AAA-rated national municipal bond with a 10-year maturity range has a current rate of 2.5%. If you're willing to invest in an A-rated bond at the same maturity range, the rate jumps to 2.8%.

Other factors that impact rates include tax status, economic conditions and inflation expectations. 

How To Buy Municipal Bonds

Start by researching the online brokerage platforms you use for other investments. They may provide access to municipal bonds, among other types.

Also, consider that many financial institutions offer bond-purchasing services. This is a good route if you want to speak with someone before making a decision. 

You can purchase municipal bonds directly by participating in initial offerings announced by local governments’ treasury or finance departments. 

With so many options, buying municipal bonds takes more research than other types. However, with the potential for solid returns, it's worth the time and effort.