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Tips On Buying Municipal Bonds

Perhaps because the municipal bond market is made up mostly of individuals rather than institutional buyers, the number of sharks in fancy suits out to rip the hide off unwary investors is highest in the muni bond market. Buyer beware! Some people have paid markups on individual bonds in some cases exceeding a full year’s interest.

If you’re interested (and can stomach it!), check out MuniAdvocate.com, a website created by Kevin Olson, a former muni bond trader turned independent investor advocate. Olson delights in cataloging municipal bond trades that should never have happened: trades with ridiculously high spreads between buys and sells where individual investors got hurt.

Some of these trades, as you’ll note if you visit Olson’s site, are clipping as much as 20 percent off the value of the bond! (Beware: Olson feels strongly that municipalities across the nation are too deeply in debt to fulfill their obligations to bondholders and that defaults in the future will be much more common.)

If you’re buying individual munis on your own, you want to take full advantage of all the latest consumer tools that allow you, in many cases, to get a pretty good idea what kind of markup the bond broker is shooting to make. You don’t want one of your trades to appear on Olson’s web list!

If you go to websites such as Investinginbonds.com, FINRA (Financial Industry Regulatory Authority), or MSRB (Municipal Securities Rulemaking Board), you can research individual bonds to see the prices paid for past transactions. If the bond was traded recently, that should give you some idea whether a broker is offering you a fair price.

The easiest way to research an individual bond is to ask the broker for its CUSIP number (an identification number assigned to bonds, as well as stocks), and then plug that number into the website’s search function.

You can avoid getting pinched too badly on trading individual bonds by going with primary issues (buying directly from the municipality) rather than secondary issues (buying on the open market).

You may also evade these somewhat nefarious brokers by visiting another website from Kevin Olson, who has launched MuniMarket.com, which Olson foresees as someday becoming an eBay for muni bond investors. If it catches on, you may find numerous prospective buyers and sellers of individual muni bonds looking to connect directly. If this baby is successful, it could provide a breakthrough in bond trading.

In the meantime, bond funds, rather than individual issues, may make better sense altogether for the majority of investors. By buying in bulk and using their professional prowess, fund managers can often get better deals than you can get on your own.

Of course, funds charge you a yearly management fee, and given the low yields of munis, you don’t want to pay too much for a fund. In fact, you want to pay as little as possible.

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