I have been doing some research on buying some municipal bonds. Can someone help to outline the pitfalls? A few I have run across so far are:

1.) I have heard that you should be careful buying bonds that are too far under the coupon value (say <$95). There is some sort of "ghost" capital gains tax you can get hit with supposedly?

2.) I thought if the bond has SFP and insurance, you pretty much have little to no risk. However, I was told that the insurance doesn't necessarily always pay out 100%. Is that true?

Thanks in advance!

Not sure how to answer your questions. I don't know the exact situation that occurred but in 2008 I held a ton of muni bonds. The liquidity went to zero for about 4 months. I got weekly payouts tax free at some absurb interest rate like 25%. It was incredible. I am sure they fixed that situation, but the penalty for not being able to sell was really good.

Fyi... Use a commissioned advisor to buy individual bonds. This is an area that you pay very little and there are many moving parts. In my experience, the retail price is the same at full service and do it yourself platforms. No benefit to going this alone.

This is interesting.. taken from Fidelity's website (Google search). They refer to a $1 markup and tout all of this transparency.. but then they interchange buying a $1000 par bond for $100. In short, they apparently markup every bond 1%, not $1. Bond pricing industry wide is listed, for some strange reason, in the format 100.0, which is $1000. You can't buy $100 worth of a $1000 bond (unless it is down in value 90%)

"Imagine buying a single $1,000 bond with a 3% coupon maturing June 1, 2032, priced at its par value of $100. Add in a $15 per bond mark-up and your yield-to-maturity drops from 3% to 2.83%. Reduce the mark-up to $1, and your yield is 2.99%"

Your risk is always bond default and/or insurance default. Insurance companies fail, municipalities sometimes can't pay their debt. So buy quality. FA's have the ability to reduce the markup but you're not getting that on a $5000 buy.

Quoting $1,000 notional bonds at $100 par value is a normal thing.

Not in my world. Quoting $1000 bond at 100 is normal.. not $100

Missed the dollar sign. That is a bit odd but could be done to dumb it down for retail.

jh0400 said:

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Missed the dollar sign. That is a bit odd but could be done to dumb it down for retail.

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Or to allow them to say they only mark bonds up by $1 instead of 1%. Just a bit deceptive that this was in their page touting their low fee. Pretty much where the industry is with full service.