What Are Municipal Bonds?

If investing in a bond interests you then you may want to consider learning more about municipal bonds, which are government-issued debt securities. Also known as “munis” these investment tools are often attractive to investors because they are typically risk-free – at least in comparison to other forms of investment.

Defining Municipal Bonds

Municipal bonds are defined as debt obligations that are issued by government entities. By purchasing this type of bond, you are loaning money to your issuer to fund government projects in exchange for incremental, predetermined interest payments and the return of the original investment that occurs once the maturity date of the loan is reached. Traditionally, these types of bonds are tax-exempt; however, there are some instances where you may have to pay taxes.

Types of Municipal Bonds

There are two types of municipal bonds that are issued by government entities: revenue and general obligation.

  • Revenue Bond – The revenue bond is one that is supported by specific projects, such as highways and toll bridges, and is paid back via funds from these sources.
  • General Obligation Bond – The general obligation bond, on the other hand, is one that is backed by the credit of the issuing jurisdiction instead of revenue coming from a specific project.

How Safe Are They?

For the most part, municipal bonds are considered safe forms of investment because they are backed by the government. However, there are instances that the issuer cannot meet its financial obligation. For instance, if you’ve purchased a revenue bond and the projects said to finance your payment at the time have not brought in enough money, depending on the amount of your payment, you may not receive your full amount on time. In order to find out the track record of the issuer you’re interested in working through, you can locate its records through the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access portal.

Investing in municipal bonds can be a rewarding experience. However, it’s good to learn all of the ins and outs of this type of bond before diving in.