Everything You Ever Wanted to Know About…Municipal Bonds!

Time to bond with bonds.  But in order to have a relationship with them, first we’d better get to know them.  We’ve pulled together some very basic questions about municipal bonds, why they are used, and who uses them.

What is a municipal bond?

A municipal bond is a bond issued by a local government (the state, city, or county) or government agency (special district, public utility, airport, seaport, or school district) to pay for projects and/or improvements. These projects can range in scope, for example, improvements to government buildings and public places, a new fire station, or public utility improvements.

What is a bond measure?

A bond measure is an initiative to sell bonds to obtain funds for public works and other projects, such as research, transportation infrastructure, and parks.

Who issues municipal bonds?

Municipal bonds are issued by states, cities, and counties. The laws and regulations of issuing debt through municipal bonds vary from state to state.

What is the interest structure on a municipal bond?

Municipal bonds can bear interest at either a fixed or variable rate, but they are subject to a cap called the “maximum legal limit.” Voters must be provided with a “Tax Rate Statement” upon the passing of any new bond which details the best possible estimate of the tax rate required to levy and fund the bond.

What is the payback period for a municipal bond?

A municipal bond may have a repayment period of anywhere form a couple months to more than 40 years!

How is it taxed?

Interest paid on municipal bonds is often exempt from federal income tax, and possibly state income tax as well, depending on the purpose of the bond. This is one of the primary reasons municipal bonds are considered over other types of bonds.

Aren’t municipal bonds for larger agencies and projects only?

Contrary to popular belief, municipal bonds can be issued in amounts as low as $2 million. They cost 2-3 percent for legal and underwriting fees if under $5 million, and these fees can be paid from the proceeds of the sale of the bonds. Depending on investment grade and credit rating, bond interest rates can be highly competitive, which is why more small communities are considering municipal bonds to raise money for projects.

What is the risk factor involved with municipal bonds?

Generally the risk involved with municipal bonds is very low, because they are backed by either revenue from public utilities or the local government. There have been rare occasions of default on municipal bonds, though that scenario is unusual.

 

Sources: Municipal Bond Issues: Not Just for Large Cities

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