In terms of the quality of the guarantee, there are two types of municipal bonds:

  1. General Obligation Bonds

  2. Revenue Bonds

General Obligation Bonds

These bonds are secured by the issuer’s entire cash flow. In the case of a city or local authority, these flows are derived mostly from tax collections, real estate taxes, other property taxes, etc.

Revenue Bonds

These bonds are secured by revenue flow from some specific project financed by the bond.

For example, in regard to bonds designated for construction of a toll road, the payments of interest and principal are secured by the expected revenues from tolls.

Municipal bonds are usually issued with a face value of $5,000 under the virtual (book-entry) registration method.

Most municipal bonds are granted a very high rating, and are considered extremely safe for investors.