Municipal Bond Definition

What Is a municipal bind ?

A municipal bond is a debt security issued by a department of state, municipality, or county to finance its capital expenditures, including the construction of highways, bridges, or schools. They can be thought of as loans that investors make to local governments. municipal bonds are often excuse from federal taxes and most state of matter and local taxes ( for residents ), making them specially attractive to people in higher income tax brackets .

municipal bonds besides may be known as “ muni bonds ” or “ munis. ”

Key Takeaways

  • Municipal bonds (“munis”) are debt securities issued by state and local governments.
  • These can be thought of as loans that investors make to local governments, and are used to fund public works such as parks, libraries, bridges and roads, and other infrastructure.
  • Interest paid on municipal bonds is often tax free, making them an attractive investment option for individuals in high tax brackets.
  • General obligation (GO) munis provide cash flows generated from taxes collected on a project.
  • Revenue munis return cash flows generated from the project itself.

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What Is A Municipal Bond?

Understanding municipal Bonds

A municipal adhere is a debt obligation issued by a nonprofit administration, a private-sector corporation, or another public entity using the loanword for public projects such as constructing schools, hospitals, and highways .

municipal bonds can generate tax-exempt income for modify residents but pay lower coupon ( interest ) rates as a leave compared with taxable bonds.

Types of Municipal Bonds

A municipal bond is categorized based on the reference of its concern payments and principal repayments. A bind can be structured in different ways, offering assorted benefits, risks, and tax treatments. Income generated by a municipal shackle may be taxable. For case, a municipality may issue a adhere not qualified for union tax exemption, resulting in the beget income being subject to union taxes .

  • A general obligation bond (GO) is issued by governmental entities and not backed by revenue from a specific project, such as a toll road. Some GO bonds are backed by dedicated property taxes; others are payable from general funds.
  • A revenue bond secures principal and interest payments through the issuer or via sales, fuel, hotel occupancy, or other taxes. When a municipality is a conduit issuer of bonds, a third party covers interest and principal payments.

$4 trillion

In 2021, the municipal adhere commercialize constituted about $ 4 trillion in assets outstanding.

municipal Bond Risks

default risk is broken for municipal bonds compared with corporate bonds. however, tax income bonds are more vulnerable to changes in consumer tastes or general economic downturns than GO bonds. For example, a facility deliver water, treating sewage, or providing other fundamental services has more dependable tax income than a park ’ second rentable protection area .

As a fixed-income security, the market price of a municipal bond fluctuates with changes in interest rates : When interest rates rise, bond prices decline ; when interest rates decline, bond prices ascend. In addition, a bind with a longer maturity is more susceptible to interest rate changes than a bail with a shorter adulthood, causing even greater changes in the municipal bond investor ’ sulfur income. furthermore, the majority of municipal bonds are illiquid ; an investor needing immediate cash has to sell other securities alternatively .

many municipal bonds carry call provisions, allowing the issuer to redeem the bond anterior to the maturity date. An issuer typically calls a shackle when concern rates neglect and reissues municipal bonds at a lower sake rate. When a adhesiveness is called, investors lose income from concern payments and face reinvesting in a bind with a lower return .

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Category : Finance

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