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What are Municipal Bonds

Navigating Municipal Bonds

Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. By purchasing municipal bonds, you are in effect lending money to the bond issuer in exchange for a promise of regular interest payments, usually semi-annually, and the return of the original investment, or “principal.” A municipal bond’s maturity date (the date when the issuer of the bond repays the principal) may be years in the future. Short-term bonds mature in one to three years, while long-term bonds won’t mature for more than a decade.

Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued. Bond investors typically seek a steady stream of income payments and, compared to stock investors, may be more risk-averse and more focused on preserving, rather than increasing, wealth. Given the tax benefits, the interest rate for municipal bonds is usually lower than on taxable fixed-income securities such as corporate bonds.

The two most common types of municipal bonds are the following:

  • General obligation bonds are issued by states, cities or counties and not secured by any assets. Instead, general obligation are backed by the “full faith and credit” of the issuer, which has the power to tax residents to pay bondholders.
  • Revenue bonds are not backed by government’s taxing power but by revenues from a specific project or source, such as highway tolls or lease fees. Some revenue bonds are “non-recourse”, meaning that if the revenue stream dries up, the bondholders do not have a claim on the underlying revenue source.

In addition, municipal borrowers sometimes issue bonds on behalf of private entities such as non-profit colleges or hospitals. These “conduit” borrowers typically agree to repay the issuer, who pays the interest and principal on the bonds. In cases where the conduit borrower fails to make a payment, the issuer usually is not required to pay the bondholders.

INTRODUCTION TO THE MUNICIPAL BOND MARKET
    • The United States Securities and Exchange Commission’s Report on the Municipal Securities
WHERE CAN MUNICIPAL OFFICIALS OBTAIN INFORMATION ABOUT MUNICIPAL BONDS?
    • The Municipal Securities Rulemaking Board’s Complimentary E-Learning course for Municipal Bond Issuers
    • Glossary of Municipal Securities Terms
    • Municipal Securities Rulemaking Board webinars and presentations
PROTECTING YOUR MUNICIPALITY
    • What To Expect When Working with Municipal Financial Professionals
    • How the Municipal Securities Market Works
RESEARCH YOUR FINANCIAL PROFESSIONALS
    • Professional Qualification Requirements
  • View Your Financial Professional’s MSRB Registration Status

    • A list of MSRB Registered Broker-Dealers and Municipal Securities Dealers
    • A list of MSRB Registered Municipal Advisor Firms and Their Associated Series 50 Qualified Representatives
  • View Your Financial Professional’s Credentials

    • A list of Series 50 Qualified Municipal Advisor Firms and Associated Series 50 Representatives
  • Review the Background of Your Financial Professional

    • Research the Professional Background and Complaint History of a Registered Broker-Dealer
    • Research the Background of a Registered Municipal Advisor
  • Research the Background of a Bank Dealer from the 3 Bank Regulators

    • Federal Deposit Insurance Corporation
    • Federal Reserve System
    • Office of the Comptroller of the Currency
  • How to File a Municipal Market Complaint

    • Report a Municipal Market Complaint
WHAT ARE SOME OF THE RISKS OF UTILIZING MUNICIPAL BONDS FOR CAPITAL?
    • United States Securities and Exchange Commission’s Municipal Securities Enforcement Actions
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
    • Office of Municipal Securities

This page is part of an Excellence in Government Fellows Program project.

Modified: April 6, 2023

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