Municipal Bonds

 

A debt obligation issued by a state, state agency or authority, or a political subdivision, such as county, city, town or village. They may be issued for general governmental needs or special projects. Issuance must be approved by referendum or by an electoral body.

Before the Tax Reform Act of 1986, interest paid on municipal bonds was exempt from federal income tax and state and local income tax within the issuing state. The terms municipal and tax-exempt were synonymous. However, the Act separated municipal bonds into two broad groups--public purpose bonds and private purpose bonds. Public purpose bonds are tax-exempt and may be issued without limitations. Private purpose bonds are taxable unless specifically exempted. The difference between public and private purpose bonds is based on the percentage in which the bonds benefit private parties.

see: debt; debt security; interest; Private Purpose Bond; Tax Exempt Security; Triple Tax Exempt

Insurance policies that protect investors if a municipal bond should default--the bonds will be purchased from investors at par. The insurance may either be purchased by the issuer or the investor. Two major insurers of municipal bonds are the Ambac Indemnity Corporation and the Municipal Bond Insurance Association (MBIA). Insured municipal bonds usually have the highest ratings. Subsequently, the bond's marketability increases, which lowers the cost to their issuers. However, the yield on an insured bond is usually lower than similarly rated uninsured bonds--the cost of the insurance is passed on to the investor. To obtain the extra degree of safety, many investors do not care if the yields are slightly lower.

See: Insured Bonds; Municipal Bond; Par; Rating; Yield

Third Party Resources

There are resources and Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) available to investors to help them learn about and evaluate municipal bonds, including:

 EMMA The Electronic Municipal Market Access system from the Municipal Securities Rulemaking Board (MSRB)Financial Industry Regulatory Authority( FINRA) information for investors