What is a Municipal Bond?
A municipal bond, or muni, is a bond issued by a state, city, county or other regional agency. Like other bonds, a municipal bond gives the purchaser a stream of future interest payments and repayment of the principal at some later date. Maturities may range from several months to 40 years. The interest earned by a municipal bond may be exempt from federal and state income tax. There are several classifications for municipal bonds. A general obligation municipal bond is one guaranteed by the full faith and credit of the issuer. These are generally issued by large, financially stable entities such as states or large cities. A revenue municipal bond is one guaranteed by an identifiable source of future revenue, such as a city’s income from utility payments or a county’s mineral royalties. Assessment bonds are based on property taxes, and are dependent on property values and the health of the regional economy. Investors consider general obligation munis to be the most secure. A municipal
hope to minimize risk to their funds. Some use bonds to diversify their portfolios and others like the income. One type of bond favored by investors is the municipal bond. A city, county or state issues a municipal bond to fund public projects such as building schools or highways. By buying a municipal bond, an investor is lending money to the issuer for the projects. In return, the issuer agrees to pay interest periodically and to return the money paid, or principal, to the investor on the bond’s maturity date. There are two basic categories that municipal bonds, also known as “munis,” fall into: revenue bonds and general obligation bonds. General obligation bonds are backed by the issuer’s ability to raise money through taxes. Revenue bonds are issued for a specific project and pay interest and repay the bonds with funds earned from the project. For example, a bond may be issued to cover the cost of building a toll bridge, with interest to be paid from the tolls charged to cross the
A municipal bond is a debt obligation of a state or local entity, such as a state highway agency or a local school district. Interest on these bonds is exempt from federal income tax and, if the bonds are issued in your state of residence, from state and local income taxes as well. Because of their tax-exempt status, municipal bonds pay a lower interest rate than taxable corporate bonds. Municipal bonds may be classified as general obligation (GO) bonds, which are backed by the taxing authority of the issuing entity, or revenue bonds, which only have recourse to the project revenues for which the proceeds are used.
