What are Municipal Bonds?

Published by Thomas Herold in Investments

'Municipal Bonds' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Municipal bonds prove to be counties’, cities’, and states’ debt obligations. They issue these in order to raise money against future tax revenues for building highways, schools, sewer systems, hospitals, and numerous other public welfare projects.

When you as an investor buy a municipal bond, you are actually loaning a state or local government or agency money. They agree to pay you back your principal, along with a certain sum of interest that is generally paid out twice a year. The principal is commonly given back on the pre arranged maturity date of the bond.

The advantage that is most commonly touted to municipal bonds is their tax free nature. The truth is that not every municipal bond actually provides income which is tax free on both state and federal levels. Many municipal bond issues are exempt from taxes from the state and local authorities but still have to pay taxes on earning to the federal government. Municipal bonds that come without any federal taxes as well are generally known as Munis. These Munis prove to be the most appealing bonds for many investors since they are generally exempt from all Federal, state, and local taxes too. Besides this, Munis are commonly investments made in the local and state infrastructure, impacting your daily quality of life and that of your community. Projects including highways, hospitals, and housing are all covered by these types of municipal bonds.

Municipal bonds can also be further subdivided into one of two general categories. These are general obligation bonds and revenue bonds. With a general obligation bond, the interest and principal that is owed to you is commonly backed up by the issuer’s own credit and faith. They typically come underpinned by the taxing power of the issuer. This can be based on their limited or unlimited powers of taxing. General obligation bonds usually come approved by the voters who will pay the taxes that support their repayment.

Revenue bonds on the other hand are backed up by specific revenues for the project in question. Their interest and principal payment amounts have supporting revenues that come from tolls, rents from the facility that they build, or charges to use the facility that is built. Many different public works are built with revenue bonds. These could be airports, bridges, roads, sewage and water treatment plants, subsidized housing, and even hospitals. A great number of such bonds come issued by authorities which are specifically launched to create such bond issues in the first place.

Municipal bonds and notes commonly come with minimum investment amounts. These are typically denominated by $5,000. They can come in multiples of $5,000 increments as well. If you want to buy a municipal bond, you can buy them directly off of the bond issuer when they come out on the primary market, or alternatively off of other bond holders after they have come out, from the secondary market.

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The term 'Municipal Bonds' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.