A:

Municipal bonds are backed by dedicated taxes or revenue sources related to specific projects, or by the full faith and credit of the issuer – typically the municipality the bonds are intended to benefit.

Municipal bonds can generally be divided into general obligation bonds and revenue bonds. The difference between the two categories is principally the source of interest and the principal payments.

While municipal bonds are commonly tax-exempt, at least in regard to federal income taxes, bonds come in a variety of forms, with varying structures of payments and tax consequences as well. Therefore, it is important for investors to research any municipal bond issue prior to deciding to purchase bonds.

General Obligation Bonds

General obligation bonds are essentially backed by the full faith and credit of the governmental entity that issues the bonds, although the backing for a specific bond issue may be from dedicated tax sources or simply from the general funds of the governmental entity. General obligation bonds are not typically backed by specific project fees, such as highway use or other toll fees.

Revenue Bonds

Revenue bonds are backed or secured by revenues from the issuer or by specific taxes, which can range from sales taxes to facility use taxes. The issuers of revenue bonds are commonly private sector entities (such as a school or hospital), non-profit organizations, or specific municipal entities (such as the public transportation authority or housing authority).

Insured Municipal Bonds

Some municipal bonds, either general obligation or revenue bonds, are insured. In these instances, the issuer obtains an insurance policy from a commercial insurance company that insures the payment of both interest and principal payments in the event that the bond issuer defaults on making the payments as scheduled. When considering investments in insured bonds, investors consider the credit rating of the bond issuer as well as the credit rating of the insurer.

RELATED FAQS
  1. What do cities do with the funds generated from municipal bonds?

    Learn more about municipal bonds, including the various types of bonds issued and the purposes of municipal bond funds, such ... Read Answer >>
  2. What is a triple tax-free municipal bond?

    At its core, a triple tax-free municipal bond is just like any corporate bond: it is a debt instrument, a loan given to a ... Read Answer >>
  3. What is the difference between municipal bonds and standard money market funds?

    The primary difference between municipal bonds - also known as "munis" - and money market funds is that municipal bonds are ... Read Answer >>
  4. How can you use a debt service coverage ratio (DSCR) to evaluate municipal bonds?

    Learn how the debt service coverage ratio (DSCR) can be used by investors to analyze the risk level of revenue bonds offered ... Read Answer >>
Related Articles
  1. Investing

    Why Muni Bonds and Bond Funds are Perfect Together

    Municipal bonds and bond funds differ in several ways, which is partly why they complement each other well.
  2. Investing

    A Look at the Pros and Cons of Muni Bonds

    Considering muni bonds? Here's a look at their pros and cons.
  3. Financial Advisor

    Why You Should Invest In Municipal Bond ETFs

    These versatile instruments have become popular with investors in higher tax brackets and fill a specific niche in the wide selection of fixed-income offerings.
  4. Investing

    5 Reasons to Invest in Municipal Bonds When the Fed Hikes Rates

    Discover five reasons why investing in municipal bonds after the Fed hikes interest rates, and not before, can be a great way to boost investment income.
  5. Financial Advisor

    How to Find the Best Bets in Muni Bonds

    Approach investing in municipal bonds the same as you would investing in stocks.
  6. Investing

    Consider These Municipal Bond ETFs

    Though relatively low-risk, there are still some factors to consider when taking the plunge into municipal bond ETFs.
  7. Investing

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace the municipal bonds portion of the Series 7 Exam.
  8. Investing

    4 Tax-Free Muni Bond ETFs to Consider

    Tax free municipal bond ETFs are an excellent way to build wealth slowly. Here are 4 you should consider.
  9. Investing

    The Top 5 Municipal Bond Funds for 2016

    Understand how the addition of municipal bond mutual funds can enhance a portfolio, and learn the top-rated municipal bond funds to consider for 2016.
RELATED TERMS
  1. Revenue Bond

    A municipal bond supported by the revenue from a specific project, ...
  2. Bond

    A bond is a fixed income investment in which an investor loans ...
  3. Bond Buyer 11

    An average yield on a particular day of 11 selected general obligation ...
  4. The Bond Buyer

    The Bond Buyer is a municipal bond market daily trade publication. ...
  5. Bond Buyer Index

    An index published by The Bond Buyer, a daily finance newspaper ...
  6. Net Debt To Estimated Valuation

    A ratio comparing the net value of a municipal bond issue to ...
Hot Definitions
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.
  2. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  3. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  6. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
Trading Center