A municipal security, or muni, is a bond issued by a state or local government. In this case, "local government" is defined rather broadly: it can mean a city, town or county, but it can also mean a school district or water district. It can mean authorities dedicated to such public works projects as highway improvement, airport expansion, hospital or low-income housing construction, or the purchase of land for a new library. Neither-fish-nor-fowl entities like Puerto Rico, Guam and the District of Columbia also issue munis.

Muni Basics
Municipal securities have the benefit of being tax-exempt at the federal level in all cases, and the state and local levels under certain circumstances. Meanwhile, government bonds - the legal or moral obligations of the federal government - are tax-exempt at the municipal level but not at the federal level.

It may sound unfair, but Uncle Sam can tax any gains you make in the course of lending him money. Corporate bonds are taxable at all levels, but they typically have higher interest rates to compensate. Later on you will see why it is important to know your client's tax rate so you can determine if she is better off with a 10%-yielding corporate debenture, an 8% T-note or a 5% muni.

Look Out!
Although munis are issued by governments, they are not known in financial parlance as "government bonds". Government bonds are issued by the federal government and its agencies. Munis are a different class altogether and should never be referred to as "government bonds".

For more, see The Basics of Municipal Bonds.


Muni Pricing
There are two ways of quoting a muni price:
  1. Basis price: Sometimes called "yield price"; this price is expressed in terms of the yield to be realized by the purchaser.

  2. Dollar price: Expressed in terms of dollars per $100 par value; it may be the transaction price or may be derived from the basis price.
Look Out!
Not only is "dollar price" rarely used, today it is actually an inaccurate term. Munis are normally denominated in $5,000 increments, not $100.

Issuing Munis

Related Articles
  1. Financial Advisor

    Top 4 Ways to Avoid Muni Bond Mistakes

    Muni bonds are often perceived as safe investments. But it's important to do some thorough research before investing.
  2. Investing

    Foreign Investors Flock to U.S. Municipal Bonds

    Interest in U.S. municipal bonds by foreign investors is on the rise. Here's why.
  3. Investing

    Top 2014 Muni Bond ETFs

    April 15 came and went, but the memory of how much of your pay the IRS helped itself to should remain clear. As should the realization that you probably should have done more to limit your tax ...
  4. Financial Advisor

    How to Find the Best Bets in Muni Bonds

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

    What Is A Municipal Bond?

    A municipal bond is a debt instrument used by a city, state, county or other local government authority to raise money for a project. Municipal bonds, often called munis, are considered a debt ...
  6. Investing

    What's a Tax-Efficient Investment for a Large Sum?

    Here's how to invest a large sum, such as assets from a profit-sharing plan, with a mind toward tax efficiency.
  7. Investing

    What's Going On With Muni Bonds?

    Should investors worry about the turbulence in the muni market?
  8. Financial Advisor

    Tax-Free Income Funds You Should Shortlist (FKTFX, VLTCX)

    Looking for holdings for the fixed-income portion of your investment portfolio? These top tax-free income funds may fit the bill.
  9. 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.
  10. Investing

    How to Diversify with Muni Bond ETFs

    Thinking of diversifying with bonds? Consider these muni bond ETFs.
Frequently Asked Questions
  1. Why Do Most of My Mortgage Payments Start Out as Interest?

    Fear not: Over the life of the mortgage, the portions of interest to principal will change.
  2. What is the difference between secured and unsecured debts?

    The differences between secured and unsecured debt, and how banks buffer risks associated with each type of loan through ...
  3. How Many Times has Warren Buffett Been Married?

    Warren Buffett has been married twice in his life, but the circumstances surrounding the marriages were unconventional.
  4. What's the smallest number of shares of stock that I can buy?

    Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not as straightforward. ...
Trading Center