Municipal Bond
A municipal bond is a debt security issued by a state or municipality to finance its capital expenditures, particularly with the construction of schools, highways, or bridges. Munis can be thought of as loans that investors make to local governments. These bonds are exempt from federal taxes and most state and local taxes, making them especially attractive to people in high-income tax brackets.
TYPES OF MUNICIPAL BONDS
1. General Obligation Bond (GO)
- Issued by governmental entities, not backed by revenue from a specific project
- Backed by "full faith and credit"
- Some GO bonds are backed by dedicated property taxes
2. Revenue Bond
- Secures principal and interest payments through the issuer or sales, fuel, hotel occupancy or other taxes
RISKS OF INVESTING IN MUNI BONDS
Call risk
Interest rate risk
Inflation risk
Liquidity risk
USES OF MUNI BONDS
Construction of schools
Construction of libraries
Construction of infrastructure (roads, bridges, public transit)
Funding police departments
Funding fire departments
Building parks and pathways
Funding community centers
Funding waste management