Municipal Bond Checklist

Use this checklist to help avoid some of the most common pitfalls of municipal bond investing.

 

  Consider your investment objectives and level of risk you are willing to accept. Understand that the yield of the bond generally increases with the risk of the bond and the time to maturity.
  Determine when you want your money (principal) back. Municipal securities are generally illiquid and may be difficult to sell before maturity. Typically, the smaller the amount you wish to sell, the more difficult it is to sell the bonds. If you decide to sell the bonds before maturity, you must find a buyer who is willing to purchase them, and you may not receive a return of your entire principal.
  Determine the type of bonds you are interested in purchasing (such as general obligation or, revenue), and make sure you understand the terms, features and risk factors, as well as the source of repayment of the debt.
  Before you invest, obtain and read, or have your investment professional review with you, the Official Statement (the primary disclosure document for the security) and any supplements, as well as any continuing disclosures made by the issuer.
  Confirm with your investment professional whether the issuer is current in its continuing disclosure filings and be sure to review the information in the disclosures. Be wary of bonds whose issuers are not current in their disclosure filings, as it may be difficult to ascertain their current financial condition.
  Review your bond's credit rating and the issuer's creditworthiness. Has the issuer of the bond recently been downgraded?
  If the bond is insured or otherwise backed by a third-party, review the credit rating of the bond insurer or other backing.
  Know your bond’s duration. The higher the duration number, the more sensitive your bond investment will be to changes in interest rates. To find a bond fund’s duration, look in the fund’s Fact Sheet. For the duration of an individual bond, ask your investment professional.
  If you buy a bond in the secondary market, be sure to ask why the bond is priced as it is. Be aware that a bond can be priced above or below its par value for many reasons, such as changes in the creditworthiness of a bond's issuer or changes in prevailing interest rates.
  Understand how the bond's interest will be paid. Most municipal bonds pay interest semiannually, but zero coupon municipal bonds pay all interest at the time the bond matures and the principal is returned. Variable rate bonds typically will pay interest more frequently, often on a monthly basis in variable amounts.
  Understand the bond's tax implications, including the possibility that your bond may be subject to the federal Alternative Minimum Tax (AMT) or may be fully taxable. Also understand whether the bond has any state tax benefits. Consider consulting a tax professional about the tax implications for your financial situation before buying a municipal security.
  Know a bond's call/redemption provisions. Call/redemption provisions allow the issuer to retire the bond before it matures. You can find the call provisions in the Official Statement.
  Know what you are paying for your bond, which will be reported on your confirmation statement. Most bonds are sold without a commission—instead, the investment professional usually is compensated through a dealer's markup, or profit, which is included within the price. This amount is usually not shown separately on your confirmation statement. If a commission is charged, this will be reported on your confirmation statement.
  Review your confirmation statement as soon as you receive it to be sure the information is accurate and in line with what you were told by your investment professional.

 

For more information, read our Investor Alert, Municipal Bonds—Important Considerations for Individual Investors.