A municipal bond is a bond that is issued by a government entity typically below the state level. Oftentimes a municipal bond will be issued by a local government to raise money for roads, schools, hospitals, and other public use projects. Occasionally, a municipal bond can be issued for a private use project.

A bond is defined as a monetary entity that is held by the purchaser for more than one year. A bond will earn interest on the principal purchase price until its maturity date for the duration that the bond is held by the purchaser.

A municipal bond will pay interest to the purchasers at specified time intervals with the promise that the original principal will be paid at a later date, known as the maturity date of the bond. Oftentimes municipal bonds are issued with a maturity date of 10, 20, 30, or even 40 years away.

Most municipal bonds pay interest in semiannual payments until the maturity date. One type of municipal bond that does not pay semiannual interest payments is a zero coupon bond. This type of bond will compound the interest semi-annually and make one lump sum payment to the holder of the bond. This payment will include the original principal and compounded interest accrued up to the maturity date.

Typically municipal bonds are issued to the public in one of two forms: general obligation bonds and revenue bonds. A general obligation bond tends to be one that is issued after a public vote approving the measure.

The general obligation bond’s principal and interest are secured by the government backing the bond and are said to be a safe investment in stable governments. When a new school is being built and the local government issues general obligation bonds to raise money to build the school the local government backs the bonds.

In contrast, a revenue bond is secured by the revenue that results from the purpose of the bond. For instance, if a revenue bond is issued to build a toll road, the tolls that result from the road would secure the principal and interest of the bonds that were issued.

The primary benefit of municipal bonds is that they are typically tax-exempt from federal, state and local taxes with a few exceptions. The tax status of the bond will generally be issued by a law firm, or other tax authority, prior to offering in a primary or secondary market.

Municipal bonds can be bought on the primary market or the secondary market. This means that the bonds can be bought directly from the issuer at the time of issuance, known as buying from the primary market. Additionally, a purchaser may buy a bond from another municipal bond holder after the bonds were issued, known as buying from the secondary market. In general, municipal bonds are issued in denominations of $5,000.

Keep learning more:

1. Government Bonds 101: Introduction to US Treasury Bills


2. Corporate Bonds 101: An Introduction to Corporate Bonds


3. The 3 Different Types of Bonds


4. The Disadvantages of Investing in Bonds


5. The Advantages of Investing in Bonds


6. Inflation is the Biggest Risk of Bond Investing


7. The 3 Basic Types of Mutual Funds

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