Municipal Bonds Definition

Municipal bonds are commonly known as “Muni” bond is a form of debt security that is issued by the local or state government. The bond investor effectively loans an amount of money a government entity that pays the bond holder the investment along with the generated interest. Issuers usually utilize the municipal bond in order to run day to day activities or to fund for projects like hospitals, schools and roads.


There are two prominent types of municipal bonds which are general obligation bonds and revenue bonds. General obligation bonds are unsecured bonds that are backed by the full faith of the municipality. They help to secure the principal amount of money and he interest. These bonds generally have minimum maturities of about 10 years and are paid off by the funds that are generates by the taxes and other fees. Revenue bonds on the other hand are repaid by the revenue that is generated from the projects that are financed by the bond.


Sometimes the bond issuer is not obligated to pay any amount of interest to the bondholder till a specific amount of revenue is generated. The revenue bonds are mostly issued by some special agencies. The projects that are financed by these bonds include airports, highways and healthcare services. But these bonds come with a certain amount of risk since the returns of these bonds depend upon the generated revenue.


Municipal bonds can be directly obtained from the bond issuer or from secondary market through a bond dealer. The most popular method to invest in municipal bonds is to buy shares of the muni fund. The muni funds generally do not have any maturity date and pay quarterly or monthly income. The tax free status of municipal bonds makes them one of the most popular bonds among the investors. Investors with high tax brackets particularly obtain maximum benefits out of these bonds.


Moreover they are issued by the local or state government that are likely to repay the debts. Conservative investors benefit from the low risk factor of these bonds. High yield municipal bonds are a great way to generate an income that is exempt from taxes and can produce maximum yields than any other savings account.


One of the greatest advantage of municipal bonds is that you can sell these bonds prior to the maturity date of the bond. You can obtain more benefits if you sell these bonds in the open market. They are most suitable for the investors who have long term time horizons.


The quality of the municipal bonds is evaluated by the rating agencies like the Moodys, Fitch, Standard & Poors. Resources such as the EMMA i.e Electronic Municipal Market Access can help the investors to access the trade activity, access fillings and disclosures of the municipal issues.

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