Municipal Bonds: Important Information for Investors

Municipal Bonds (nicknamed munis) are bonds issued by cities, states, counties and various districts to raise money to finance operations or pay for projects including: Building highways, housing, library, airport, new schools or other community projects. Municipal Bonds have a Maturity Date, when the bonds will be redeemed or purchased on a specific date and amount. The authority to issue Municipal Bonds, are authorized by voters or legislatures. These bonds are sold to investors, which include financial institutions, corporations, and individuals. A brokerage firm or financial institution will be chosen to underwrite or sell Municipal Bonds for a municipality. Interest paid on Municipal Bonds are set at a fixed rate, and paid every six months. Anyone that purchases a Municipal Bond, within the same state where they live, would be exempt from paying any Income Tax, on the interest collected. Also, if the investor lives in a State, were there is no State Income Tax, then the same tax advantage would apply. Otherwise, a portion of the interest earned would be taxable. When a Municipal Bond is sold at gain, either before or upon Maturity Date, the investor has to pay a capital gain tax. In 2004, $383 billion of Municipal Bonds where sold, compared to $359 billion sold in 2003.Municipal Bonds are either General Obligation Bonds or Revenue Bonds. General Obligation Bonds are secured to pay the interest, by the ability to collect tax revenue. Revenue Bonds are secured to pay the interest by income collected, from sources within the community, which include utilities, water, tolls or other sources.

Definitions for Municipal Bonds