FAQs: Municipal Bond

1. What are municipal bonds?

Municipal bonds, often called munis, are debt obligations of states, cities, counties, or other political subdivisions of states in the United States.

Two common types are:

•  General obligations (GOs), used for general expenditures and backed by the issuer’s full faith and credit (taxing and borrowing power); and

•  Revenue bonds (REVs), used to finance specific public service projects and backed by cash flow from those projects. Examples are bonds to finance bridges, turnpikes, tunnels, water and sewer systems, schools, power plants, prisons, transportation systems, hospitals, sports complexes, and airports.

Like other debt obligations, municipal bonds may be issued at a discount as zero coupons. They may also be stripped like Treasuries and sold and backed by investment brokers.

2. What are some other varieties of municipal securities?

Other varieties of municipal securities include tax bonds, tax anticipation notes (TANs), and revenue anticipation notes (RANs), which are obligations sold in anticipation of general or specific tax receipts or other income that the issuing government entity expects to collect.

3. How are industrial development bonds different from other types of municipal bonds?

As a means of attracting business to a community, a local government may issue a type of revenue bond called an industrial development bond (IDB), to finance construction of facilities for lease to a private corporation. The private company backs these securities, so the bond holder has a financial tie to that company, as well as to the issuing government authority.

4. How do I value a municipal bond?

You may use any one of the following options:

•  the bond’s maturity value;
•  the value as shown on an account statement at the end of the reporting period;
•  the current market value as reported in daily newspapers; or
•  a good faith estimate if the exact value is unknown or not easily determined.

 

This guide is not intended to provide investment advice, and you should not rely on statements in this guide when making investment decisions.

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