Do You Know What a Municipal Bond Is?

Written by author on May 21, 2010 – 7:31 pm -

Taxes are the number one way to raise money for the government, but there are times when taxes are not enough and government agencies at the state, county, and city levels will use municipal bonds to raise money. The funds raised from these bonds might be used for projects that include new schools, building highways and hospitals, and for work on sewer systems. A Municipal bond can be issued by cities, counties, school districts, redevelopment agencies, airports publicly owned, and more.

What is attractive to investors about municipal bonds is that the interest received is exempt from federal taxes. It’s also possible for the interest on these bonds to be exempt from local and state taxes, which makes them even more attractive. These types of bonds typically pay the investor interest back, typically twice a year, and then, on a specified date, the issuer will pay the investor back the principal. This interest is usually at a lower rate than with other types of investment, but most investors accept the tax-exempt quality of these types of bonds. This makes investing in municipal bonds more lucrative, which draws investors.

Types of Municipal Bonds

There are two types of municipal bonds: general obligation and revenue. General Obligation bonds are bonds that are not secured, or insured, and are only backed by full faith and credit. This means that there is an unconditional agreement that is guaranteed by the US Treasury or other government body to pay the interest and the principle. In general, General Obligation bonds take at least 10 years to mature and are often paid with taxes.

Revenue bonds are used to fund projects that will earn money themselves and the bonds are paid back to the investor using revenue created from the projects. Sometimes, these bonds are not required to pay interest until a specific amount of revenue has been made.

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