Municipal bonds may be issued by:
- Other Local Authorities.
Municipal bonds are sometimes referred to as Munis.
Municipal bonds are generally issued in order to raise funds for specific public works projects such as, building toll roads, bridges, sport stadiums and the like.
There are two different types of municipal bonds:
- General Obligation Bonds
These are bonds that are backed by all of the issuer’s income sources. In the case of municipalities, the main source of income is taxes.
- Revenue Bonds
These bonds are only backed by the revenues generated by the project that is financed by the bond. For example, if bonds are issued to build a toll road, then the tolls collected guarantee the bonds.
Municipal bonds are generally have a par value of 5,000 and are recorded through Book-Entry, just like government bonds.
Most municipal bonds receive very high ratings, and are considered very safe investments.
Characteristics of Municipal Bonds
- High Yield
Municipal bonds generally have higher yields than government bonds.
- Tax Free
Interest received on municipal bonds is not subject to federal taxes, and if you live in the state where a bond is issued, you don’t pay state taxes either.
Many municipal bonds are insured by outside companies, and therefore the investor receives extra protection. Bond insurance will be explained in the following section.
There are a wide variety of municipal bonds available. Most of them are rated between AA and AAA.