Muni Bonds
Municipal bonds are bonds issued by local governments that are used to fund various projects such as improving roads, hospitals, and/or building schools. When you invest in a municipal bond, you’re effectively loaning money to the government. Municipal bonds will provide a guaranteed rate of return in the form of interest payments. These interest payments are exempt from federal taxes and in some cases, state and/or local income tax depending on whether you are a resident of the state that issued the bond.
Types of municipal bonds
General obligation bonds are a type of municipal bond where the issuer secures the debt with its tax authority. In many cases, general obligation bonds are issued to raise funds to complete a large project, after which a government agency repays the debt over time with tax revenue.
General obligation bonds are backed by two types of tax pledges:
Limited tax pledges: Annual taxes are charged within the limits of existing laws and are used to ensure the debt will be paid.
Unlimited tax pledges: Taxes are levied in a way that ensures the debt will be repaid, without a limit placed on the tax rate or the amount raised.
General obligation bonds are usually issued by state and local governments as well as school districts.
Revenue bonds are often used to finance ongoing projects, such as infrastructure upgrades. Unlike general obligation bonds, revenue bonds are not tied directly to a general tax authority. Instead, the taxes or fees charged are designed specifically to ensure the muni bond debt will be repaid. You can break revenue bonds into two main types:
Tax revenue municipal bonds. These revenue bonds receive backing from a portion of ongoing taxes.
Enterprise municipal bonds. Rather than relying on taxes, enterprise revenue bonds focus more on the income raised by the costs of using something. Often, these types of bonds are issued by entities that charge for a service, such as utilities, airports, hospitals and even sewer authorities.
Reasons to invest in municipal bonds
Tax free income on earnings
Low risk way to invest
You can invest in muni bonds directly with your brokerage firm. With all investments, please perform research and choose the right investment option that’s best for your current/future needs.