Bond issued by a state, city, or
local government.
Municipalities issue bonds to raise
capital for their day-to-day
activities and for specific
projects that they might be
undertaking (usually pertaining to
development of local
infrastructure such as roads, sewerage, hospitals etc).
interest on
municipal bonds are generally
exempt from
federal tax. In the
case that the bond is bought by a
resident of the state that issued the bond, the interest
payments are also exempt from state tax. Interest payments are further exempt from local tax if they are bought by
residents of the locality that issued the bond.
Capital gains however are taxable. Given the tax-savings they
offer, municipal bonds are often bought by
people who have large tax
burdens.
Yields on municipal bonds are often lower than
corporate or
Treasury bonds with comparable
maturities, because of the important advantage of not being taxed at the federal level. In general, municipal bonds are considered safer than
corporate bonds, since a municipality is far less likely to go
bankrupt than a
company. Some municipal bonds can also be
insured by outside
agencies. These
companies will
promise to
pay the interest and
principal if the
issuer defaults. Both
issuers and
bondholders can carry this
insurance, though a bondholder would
need to have a large
stake to get the
coverage. There are two common
types of municipal bonds: general
obligation and
revenue. General Obligation (GO) bonds are
unsecured municipal bonds that are simply backed by the
full faith and credit of the municipality. Generally, these bonds have maturities of at least 10 years and are
paid off with
funds from
taxes or other
fees.
Revenue bonds are used to
fund projects that will eventually create revenue directly, such as a
toll road or
lease payments for a new
building. The
revenues from the projects are used to pay off the bonds. In some
cases the issuer is not obligated to pay interest unless a certain
amount of revenue is generated. Municipal bonds usually come in $5,000
par values and usually require a minimum
investment of $25,000 in
order to get the best
price.
also called muni.
