To buy municipal bonds directly, open an account with a broker-dealer registered with the Securities and Exchange Commission, research individual bonds on the MSRB’s EMMA system, and place an order either in a new issue (the primary market) or from another investor (the secondary market). Most bonds trade in $5,000 minimum denominations, and the interest you earn is generally exempt from federal income tax under 26 U.S.C. § 103.1Office of the Law Revision Counsel. 26 U.S. Code 103 – Interest on State and Local Bonds
Open a Brokerage Account
You cannot walk up to a city treasurer and buy a bond. Municipal bonds move through broker-dealers, so the first step is opening an account with one. On the application, expect to hand over your Social Security or Tax Identification Number along with information about your income, net worth, investment experience, risk tolerance, and goals.
That information isn’t just paperwork. Under MSRB Rule G-19, the broker must have a reasonable basis to believe any bond it recommends fits your financial situation, tax status, investment timeline, and liquidity needs.2MSRB. Rule G-19 Suitability of Recommendations and Transactions The more accurate your answers, the more useful the suitability review.
Once the account is live, you can search available inventory by issuer name, state, maturity date, or credit rating. Each bond has a nine-character CUSIP code that identifies it uniquely.3CUSIP Global Services. About CGS Identifiers The standard minimum denomination is $5,000, though some issuers set it at $1,000 to attract local investors and others at $25,000 or $100,000 to target institutions.4Municipal Securities Rulemaking Board. How Are Municipal Bonds Quoted and Priced
Research the Bond on EMMA Before You Buy
Every municipal bond has an Official Statement, which is the closest equivalent to a stock’s prospectus. You’ll find it on the Electronic Municipal Market Access system (EMMA), a free public site run by the MSRB.5Securities and Exchange Commission. Exhibit 4 – Electronic Municipal Market Access (EMMA) Functionality It lays out the repayment terms, legal opinions, the issuer’s financial health, the source of funds backing the bond, and whether the issuer can redeem the bond early.6MSRB. Official Statements
Two items deserve close reading. First, what backs repayment: general tax revenue, a specific project’s income, or something else. Second, the call provisions, which set whether and when the issuer can pay off the bond before maturity. EMMA also shows trade history for the bond, so you can compare recent prices and volumes against whatever your broker is quoting you.
Credit rating agencies such as Moody’s, Standard & Poor’s, and Fitch grade many bonds. Moody’s runs from Aaa down to C; S&P and Fitch use AAA through D. Anything Baa/BBB or higher is investment grade. An unrated bond isn’t automatically dangerous, but with no independent agency assessment you’ll need to lean harder on the Official Statement. Ratings matter most if you might sell before maturity, because a downgrade can dent the resale price even when the issuer is still paying on time.
General Obligation vs. Revenue Bonds
Municipals split into two broad camps by what stands behind repayment. The distinction changes both the risk and the yield you should expect.
General obligation bonds are backed by the full faith and credit of the issuing government, which can raise taxes if needed to pay bondholders.7MSRB. Municipal Bond Basics Among rated issuers, they have had nearly no defaults over long historical periods.
Revenue bonds are backed by income from a single project or source, such as toll roads, airports, water systems, hospitals, or universities. If the project underperforms, the issuer has no obligation to tap general tax revenue to make you whole.7MSRB. Municipal Bond Basics Yields are usually a touch higher to compensate. Essential-service revenue bonds (water, sewer, public universities) have historically defaulted at very low rates; healthcare and housing revenue bonds have defaulted more often.
Placing an Order in a Primary Offering
A primary offering is your chance to buy directly from the issuer at the initial price, before secondary trading begins. You place a conditional order with your broker during the order period, which usually lasts only a few hours or a single business day. Your broker submits it electronically with your dollar amount and the number of bonds you want.
Popular deals get oversubscribed, meaning orders exceed the supply. When that happens, the issuer works through a priority list to hand out bonds. Many retail-oriented offerings put individual investors ahead of institutional buyers. Once allotment is set, your broker sends a confirmation showing how many bonds you were awarded, the purchase price, and the expected yield. That confirmation is your legal record.
Settlement follows. As of May 28, 2024, municipal securities settle on a T+1 cycle, meaning the trade finalizes one business day after the trade date.8Investor.gov. New T+1 Settlement Cycle – What Investors Need To Know Your brokerage moves the funds during that window, and once settlement completes the bonds appear in your account and start earning interest on the schedule set in the terms.
Placing an Order on the Secondary Market
The secondary market is where you buy bonds that other investors already hold. On your brokerage platform, search by issuer, CUSIP, state, maturity, or rating. Every listing shows a bid/ask spread: the highest a buyer will pay and the lowest a seller will take. A market order buys immediately at the current ask; a limit order caps what you’re willing to pay.
You’ll owe the seller accrued interest for the period since the last coupon payment. Municipal bonds calculate that using a 30-day month and 360-day year convention.9MSRB. Rule G-33 Calculations Buy 60 days after the last semiannual payment and you pay the seller for 60 days of interest, which you recover when the next full coupon lands. Secondary trades also settle T+1.10FINRA. Understanding Settlement Cycles – What Does T+1 Mean for You
Markups and Time-of-Trade Disclosure
Secondary market dealers get paid through markups (selling to you) or markdowns (buying from you) rather than an explicit commission. Under MSRB Rule G-30, every price a dealer charges must be fair and reasonable.11MSRB. Rule G-30 Prices and Commissions Since 2018, dealers must disclose that markup on your trade confirmation as both a dollar figure and a percentage of the prevailing market price whenever they executed an offsetting trade the same day.12Municipal Securities Rulemaking Board. Resource on Disclosing Mark-ups and Determining Prevailing Market Price Your confirmation also has to include the time of execution and a link to the bond’s EMMA page. Compare your fill against the recent trades listed there. A meaningful gap is usually the dealer’s markup.
Beyond price, MSRB Rule G-47 requires your broker to share all material facts known about the bond at or before the trade, such as whether the bond carries market discount that could trigger ordinary income tax, whether it is callable, and whether it prepays principal.
Federal and State Tax Treatment
The reason many investors bother with individual municipals is the federal tax treatment. Under 26 U.S.C. § 103, interest from bonds issued by state and local governments is excluded from gross income for federal purposes.1Office of the Law Revision Counsel. 26 U.S. Code 103 – Interest on State and Local Bonds If you sit in a high federal bracket, the after-tax return can beat a higher-yielding taxable bond.
The exclusion isn’t universal. Private activity bonds, whose proceeds fund projects for private entities, are taxable unless they qualify under a specific tax code exception. Interest on certain private activity bonds is also a tax preference item under the Alternative Minimum Tax, so if you’re subject to the AMT you may owe on that interest even though it’s exempt under the regular income tax.13Office of the Law Revision Counsel. 26 U.S. Code 57 – Items of Tax Preference Check the Official Statement for that classification before buying.
Reporting still happens. Your broker sends a Form 1099-INT with tax-exempt interest in box 8, which you report on line 2a of Form 1040. If you bought at a premium, report only the net after subtracting the year’s amortized premium.14Internal Revenue Service. Instructions for Schedule B (Form 1040) Box 9 shows any private activity bond interest that may be subject to the AMT, which you handle on Form 6251.
State treatment varies. Most states exempt interest on bonds issued within your home state but tax interest from bonds issued elsewhere. Rates run from zero to over 13 percent, so out-of-state bonds can quietly erode your tax edge. If preserving the full benefit matters, keep purchases in-state.
The De Minimis Rule on Discount Bonds
Buying a municipal bond on the secondary market at a discount can trip a special rule. When the discount is larger than 0.25 percent of face value for each full year remaining until maturity, the gain tied to that discount is taxed as ordinary income rather than at the capital gains rate. Your broker must flag market discount at or before the time of trade.
Risks to Weigh Before You Buy
Municipals sit on the lower-risk end of the fixed income spectrum, but they aren’t riskless. When you own individual bonds rather than a fund, you don’t have built-in diversification, so a single issuer’s problems land on you directly.
Interest Rate Risk
When market interest rates rise, the resale value of an existing bond usually falls, because a buyer can get a better yield elsewhere. Longer maturities move more. A metric called duration estimates the sensitivity: a bond with a duration of 5 loses roughly 5 percent of its price for a 1 percent rise in rates.15Municipal Securities Rulemaking Board. Evaluating a Municipal Bond’s Interest Rate Risk Hold to maturity and the swings along the way don’t change your final payout. Sell early and they very much do.
Call Risk and Reinvestment Risk
Many municipals are callable, which lets the issuer redeem the bond before maturity, typically after rates have fallen far enough to make refinancing pay. You get the call price and any accrued interest, but the future coupons you were counting on stop.16FINRA. Callable Bonds – Be Aware That Your Issuer May Come Calling Then comes reinvestment risk: because rates have likely dropped (which is why the bond was called), you may struggle to replace the yield. Going from 5 percent to 3.5 percent costs $150 a year on every $10,000.
Credit Risk
Credit risk is the chance the issuer can’t pay interest or principal on time. Defaults among rated municipal issuers are rare, especially for general obligation and essential-service revenue bonds, but they occur, particularly among unrated bonds or those tied to a single project’s revenue. The credit rating and the disclosures on EMMA are the best tools for judging this before you commit.