What Is A Municipal Bond?

A municipal bond often referred to simply as “munis” is a type of bond that is issued from a local level government entity or a sub-entity known as an agency.  Munis function in the same way as a corporate of Treasury bond in that there is a stated amount of interest to be paid out, called the coupon, over the life of the bond.  All bonds are essentially loans to the issuer from the investor.  The bond will have a maturity date at which full repayment is expected to be made to the investor by the issuer.  There is also a stated interest rate that must be paid at timed intervals over the life of the bond by the issuer to the bond investing agent or fund.  Bonds are essential to governments and corporations alike as they offer another avenue to generate revenue without having to use the normal money borrowing outlets, or can be used in addition to them.  Municipal bonds are issued in both short term contract amounts, referred to in this context as notes, and mature usually within a year and also long term contracts that may be as long as 10 years or more in duration.  A municipal bond is noteworthy in that the interest paid out by the issuer to the investor is tax exempt at the federal level.  Munis are increasingly popular for this reason alone.  The tax break should be taken into consideration whenever comparing a municipal bond to a regular corporate bond, the latter of which will tax the interest amount paid by the bond.  At today’s current tax rate that means a municipal bond paying nearly 7% interest will equal a corporate bond paying 10%.

Variances In Municipal Bonds

Munis vary not only in their issuer but also in how they are paid out and potential risks inherent with each.  The lower the risk to the bond investing consumer, the lower the interest amount will be paid.  The most secure type of municipal bond is a general obligation bond.  This bond is guaranteed in full by the issuer.  There also exist more risky bonds, such as those based on future revenue streams or expected property tax payments.  These munis while being slightly more risky will pay higher interest rates over the bond life.

Related posts:

1. What Is The Bond Rate?
2. What Is A Municipal Bond?
3. What Are Construction Bonds?
4. What Is Bond Maturity?
5. What Is The Interest Rate On A Bond?