How to Buy a Muni Bond: 5 Key Steps

These days, experts say, the yields on longer-dated bonds are more attractive than they are on shorter-term bonds that mature in less than seven years. Investors who hold the bonds until they mature will get all their principal back-and they won't have to worry about rising interest rates temporarily hurting the value of the bond.

In these nervous times, concerns about the safety of bonds has raised demand for the highest-rated muni debt (a rated general obligation muni bond has failed only once in 30 years). That has made bonds rated just below AAA more attractive, and many pros, including Ron Schwartz, portfolio manager of the $878 million RidgeWorth Investment Grade Tax-Exempt Bond fund, think they are worth the risk.

State and local governments that issue bonds must file notices of "material events," such as a ratings downgrade on a bond, to an online database called Electronic Municipal Market Access (emma.msrb.org). But the reports aren't always fresh, so Len Templeton, a financial adviser in Chandler, Ariz., and longtime investor in municipal bonds, says investors should check municipalities' own Web sites to study their finances.

Though they don't with stocks, brokers do add a markup to the bonds they sell, above and beyond any transaction fees. Electronic Municipal Market Access and the site InvestingInBonds.com offer tutorials on bond pricing, along with recent trade data that shows how much investors paid for specific bonds.

Feeling overwhelmed? Municipal-bond funds give individuals broad exposure to tax-exempt bonds for much less than the amount needed to create a diversified portfolio of individual bonds, which planners say could run $100,000 or more. The downside: Investors potentially could pay capital gains taxes on bonds the fund manager sells at a profit.