What Is A Municipal Bond?

A municipal bond is similar to any bond one might purchase when investing their money in the stock market.  A municipal bond is generally considered a safer investment option than a regularly traded open market stock.  The key difference in a municipal bond is that it is a government issued bond, not a stock or bond held by a private entity.  More specifically in the case of a municipal bond, the bond issuer is a local government most typically a city.  Issuers of municipal bonds include but are not limited to:

Local city governments
Counties

School Districts

Redevelopment Agencies; these are typically locally mandated government commissions or bodies formed to complete, renovate or rehabilitate an area or project within a given local community.

Publicly owned airports and harbors

Any other government owned entity that is below the level of state of federal government

How Municipal Bonds Function

Municipal bonds for most aspects function in the same way as any other bond issued by the government.  An investor gives a certain amount of money to the bond holder with the promise of repayment with accrued interest after the term of the bond expires.  A municipal bond period can be anywhere from several months in some cases to the more typical 10, 20, or 30 year contract.  There is inherent risk in any investment, but with municipal bonds, government bonds in general, the risk is mitigated.  This is because you are not investing in a private company taking potential risks to get you a quick and profitable return.  The key with government issued municipal bonds is long term investment, with safe and predictable returns.

Municipal Bond Advantages

Municipal bonds carry advantages over regularly traded stocks and bonds.  One advantage is the security of investing with a government entity which is unlikely to default or declare bankruptcy as is possible with a private one.  Aside from that, the interest money accrued from a municipal bond must be weighed against taxes.  In a municipal bond, under most circumstances, there is no federal income tax levied against earnings.  When you calculate gains in interest versus typical privately held securities, this is an important detail to include.  You should always deduct the tax amount you will be charged by the IRS from the overall amount you will have made in the investment.  In this way municipal bonds can be more profitable than regular securities.

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1. What Are Construction Bonds?
2. What Is A Municipal Bond?
3. What Is The Bond Index?
4. What Is Bond Maturity?
5. What Are Bonds Investments?