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Answers to Frequently Asked Questions

Confused by bonds? Want to know more about Neighborly? Read on.

This section is under active development. If you have a specific question please contact us.

Bond Basics

What are municipal bonds?
Municipal bonds, or “munis” as we like to call them, can be thought of as a loan. They're generally issued by state or local governments to finance long-term projects. When you purchase a bond, you are lending to a large borrower, such as a government entity or corporation. The borrower makes a legal promise to repay the amount borrowed (the principal) plus interest. Munis are unique in that they can be issued as either taxable (like corporate bonds) or tax exempt where their interest is exempt from federal income tax, and in many cases, state and local taxes as well.
Why do people buy munis?
Many investors buy munis because their interest is often exempt from federal income tax, and in many cases, state and local taxes as well. Additionally, munis often fund capital projects that have an impact on our daily lives, including schools, highways, hospitals, housing, sewer systems and other important public projects.
How big is the bond market?
The size of the U.S. municipal bond market is estimated to be $3.7 trillion. On the other hand, there were 191 defaults by corporate bond issuers in 2009 alone. According to rating agency Fitch, the size of the US corporate bond market is about $4 trillion.
What is the difference between Revenue and General Obligation bonds?

A general obligation bond typically refers to a bond issued by a state or local government in which interest is paid and principal is repaid from the issuer’s general funds. Most general obligation bonds are said to entail the "full faith and credit" (and in many cases the taxing power) of the issuer.

A revenue bond typically refers to a bond in which interest is paid and principal is repaid from a specific source of revenue pledged to the bond. For example, a bond issued by a municipal water and sewer authority would typically involve revenues obtained through local water and sewer assessments. In another example, a government might issue bonds on behalf of a private entity or 501c3. In this case, interest is paid and principal is repaid exclusively from revenues pledged by the entity receiving financing.

Why are some deals missing information? (yield, interest, etc.)
Neighborly uses publicly available sources to obtain information on all bond deals. Although trusted and reliable, these sources are not always quick to update and we only post information as it becomes available. Please know that we are doing everything we can to work directly with issuers to bring you the most comprehensive view of a bond deal at the earliest stage.
What is a yield and how is it calculated?
The yield is the return you will receive on a bond, adjusted for its current price. Each bond has a fixed interest rate (known as a coupon), which does not change even when the bond's price changes in the market. In a perfect scenario, a bond is sold for its face value, and so you receive a return equal to that fixed interest rate. However, if the price of the bond fluctuates, you still receive the same fixed interest payment regardless of the price you pay for the bond.
The yield shows the return you will receive relative to the current price. If the price of the bond rises above its original value, the yield will fall, because you will receive the same fixed interest payment but pay more than the face value for it. If the price of the bond falls below its original value, your yield will rise, because you are receiving the fixed interest payment but paying less than the face value for it. For example:

The city of Neighborly, CA, wants to raise $5 million to convert city hall's power supply to solar energy. To raise the money it decides to sell $5 million of 5-year bonds, priced at $1000 each. The Neighborly Solar bonds pay 5% interest, so investors receive $50 per year for the next five years.

Erica buys a Neighborly Solar bond for $1000, its face value. Erica receives $50 interest per year. Erica's yield is 50 / 1000 = 5%.

Meanwhile, Eduardo buys a Neighborly Solar bond from a broker, but is charged $1100 for it. Like Erica and all other investors, he receives $50 interest per year. Eduardo's yield is 50 / 1100 = 4.5%.
What is a CUSIP?
A CUSIP is a nine-character code that uniquely identifies a financial security, such as a bond or stock, and is used to avoid confusion in trading. The first six characters identify the issuer of the security. Bonds are assigned CUSIPs when they are issued and approved for trading, so typically a bond deal will not have CUSIPs listed when it is first announced. CUSIP numbers are issued by the CUSIP Service Bureau, which is currently operated by S&P Capital IQ, a division of McGraw Hill Financial.
What happens if I sell my bond early?
Although munis are typically bought to be held until maturity, they can be sold from time to time to meet certain unforeseen needs. This process is known as selling your bond on the secondary market. It’s important to understand that bonds are sold at market rates so you may not receive the full principal amount back.
How do I sell my bonds?
There's a whole market, know as the 'secondary market', for these kind of sales. Neighborly doesn't currently provide secondary market services, but we would like to hear from you if you think we should. If you would like to sell a bond you bought on Neighborly, let us know by emailing us at sales@neighborly.com. We’ll talk with you about what to expect and how you would like to receive your payment. Typically, our brokers will help estimate what your bonds are worth and send out a bid to find the best price for you. If a price can be negotiated between you and the buyer, the bonds will be sold and your payment will typically be deposited to your brokerage account in 3 business days. From there, your payment can be sent to you in the form of an ACH bank transfer or a check. Please discuss your payment preference with our brokers.
What is a callable bond?
A callable bond is one that can be paid back by the issuer before its maturity date. A call provision allows an issuer to retain the right to redeem outstanding bonds and pay back the principal early. Similar to a homeowner refinancing a mortgage, an issuer can call bonds if interest rates fall so that they may reissue new bonds at a lower rate.
What can I expect if my bonds are called before maturity?
If your bonds are called, you will receive your principal back early but you will not receive any of the predicted future interest after the call date. Since your original investment will be returned to you, you will have the opportunity to reinvest in a new deal.
What is the difference between a serial bond and a term bond?
Munis are commonly issued as serial bonds with maturity dates occurring at regular intervals until the entire issue is paid back. Serial bonds have different interest rates for each maturity and generally offer investors more variation in their investments. Munis may also be issued in the form of term bonds which is a series of bonds that matures on a single date. Term bonds typically have longer maturity dates and can be issued alongside serials bonds in the same deal or by themselves.
Where does Neighborly receive information regarding investment opportunities?
Neighborly uses data provided by issuers and the Municipal Securities Rulemaking Board (MSRB). We do our best to work directly with issuers to bring you the most comprehensive view of an opportunity at the earliest stage.

Returns and Tax

How much will I earn investing in municipal bonds?
The return you earn on municipal bonds depends on the issuer of the bonds, the length of your investment, and the individual deal. The return rates on municipal bonds are lower than other types of bonds, such as bonds issued by companies, because the risk associated with investing in deals backed by a city government is lower. However, because returns on municipal bonds are in most cases tax free, you should measure the returns not simply by taking the yield of the bond, but also taking into account the tax you saved by investing in a municipal bond. The return you earn, adjusted for the tax saved, is known as the Tax Equivalent Yield.
How does the interest get paid and how will I receive my original investment?
Easy, no work on your part. The interest and original investment amount flow straight back into your bank account. Interest payments are typically made twice per year, depending on the issuer.
How do I estimate my Tax Equivalent Yield?
You can estimate your Tax Equivalent Yield using the return estimator on our How it Works page. We'll ask you for a few personal details (your income, tax filing status and the state you live in), and use that to calculate your Tax Equivalent Yield for you. Let us know if you have questions.
Are the returns I earn on municipal bonds really tax free?
Under present federal income tax law, the interest you receive from investing in municipal bonds is free from federal income taxes. In most states, interest received from securities issued by governmental units within the state is also exempt from state and local taxes. However, the federal government may not permit the tax exempt status to deals that do not provide a major benefit to the public. Consult your accountant and the Official Statement for details.
Do I need to report my tax exempt interest?
Although interest income from munis is tax exempt, taxpayers are still required to report such interest on their federal income tax returns. This is for information purposes only and does not enter into the computation of any tax that is due.

Understanding Risk

How safe are municipal bonds?
Munis have historically been considered relatively conservative investments and municipalities have a record of exhibiting stronger repayment patterns than corporate borrowers of the same credit rating. In a five year cumulative review, rating agency Fitch found that corporate bonds are 10 times more likely to default than municipal bonds. However, credit ratings should not be the sole basis for any investment decision. Please review all associated materials provided before making an investment decision.
Are bonds on Neighborly insured?
Over the past decade, the percentage of bonds that are insured has declined from over 50% in 2005 to a low of just over 3% in 2012. As of 2015, less than 8% of new municipal bond issues are insured. Historically, the number of bonds insured has fluctuated based on market pressures and demand. Read more here. Bonds displayed on Neighborly are selected for the high credit rating of the issuers. Some, but not all, will carry insurance. You can find out whether a bond is insured in the "Credit and return information" section on any deal page.
How do munis compare to other types of bonds?
According to rating agency Moody’s, there have been only 54 defaults by municipal bond issuers since 1970. The table below, based on data from Moody's, shows default rates on bonds rated between AAA (the highest rating) and BBB, the lowest rating for a deal that Neighborly features. We don't feature deals rated below BBB in order to keep the risks taken by our users as low as possible while offering a wide range of investment opportunities.
Default rates on municipal bonds, 1970-2012
Credit Rating 1-year bonds3-year bonds10-year bonds

Fees and Orders

Why is the cost of an issuance built into a bond deal?
Currently, the issuer pays all the transaction costs at issuance. An unnecessary and costly step we’re hoping to change. Until we work with issuers directly, you’ll notice that part of each deal is designated to offset the costs of issuance.
What does Neighborly charge?
We’re waiving all platform and transaction fees for a limited time.
Why is there a minimum order size for some opportunities?
Some opportunities may have higher or lower minimum requirements. Most traditional municipal bonds have a minimum of $5,000 due to common market practices. We’re working to lower these minimum requirements to allow anyone to invest in places they care about. If a bond does have a higher or lower minimum, this will be indicated on the order screen.
What happens after I submit an order?
After you submit your order, your request is placed in the order queue. If you have not yet verified your bank account with us, you will be sent instructions on how to do so (this process can take 1-2 days depending on your bank). If your account is already verified, your order will be confirmed within 24 hours and you will receive an email notification when your payment has been processed. For all investment opportunities, we do our best to guarantee verified investors a minimum order size, and fulfill larger orders in order of participation.
How do I cancel an order?
If you wish to cancel an open order, you must click the cancel button on the unwanted order under the My Investments tab in your Neighborly profile before orders have been processed. Failing to cancel your open order before processing will result in your participation.

Security and Privacy

How do I know my information is safe with Neighborly?
We take security seriously. Though we strive to create a streamlined investment experience, security is never a trade-off. Bank account information is sent directly to our trusted payment gateway; we do not keep this information and it is never sent to our servers. All other communications between your computer and our servers are encrypted for your protection. If you have any kind of report related to the safety of our systems, please reach us at security@neighborly.com.
Are you a broker-dealer?
Neighborly is a minority owner of a broker-dealer under which we are licensed to sell municipal securities.
What does Neighborly do with my personal information?
Neighborly will never sell, trade or share your information with third parties without your consent. We share certain information with our partners in order to comply with regulations set by the Securities and Exchange Commission.
Why does Neighborly ask about my income before I can see certain investment opportunities?
Due to securities regulations, certain investments are restricted to investors who have experience in investing and/or are located in certain states. We're working to widen access to local investing to as many people as possible. If you're based in the U.S. and would like wider access to investment opportunities, tell us your story. Your experiences help us make the case for opening up local impact investing.
Why does Neighborly collect my Social Security number (SSN) and employment information?
The U.S. government requires all brokers, including our partners, to collect this information. Read more about these requirements. Your SSN and ID information may be used to verify your identity when processing an order. This is a one-time process.