What are Municipal Bonds?
A municipal bond is a bond or fixed-income financial instrument that is issued by a city or a local government body and their coordinating agencies. Potential issuers of municipal bonds include the following local areas: cities, counties, special-purpose districts, redevelopment agencies, public utility companies or districts, publicly operated airports and seaports, school districts, and any other entity that is intertwined with a locality’s government.
Municipal bonds are offered by the locality or government body to help fund a particular project and raise money to pay-off expenditures. The bonds can come in two forms: general obligation bonds or secured investments that are backed by specific revenue streams.
In the United States of America, municipal bonds offer their holders interest income that is typically exempt from federal income tax as well as the income tax of the state in which the bond was issued. That being said, some forms of municipal bonds (depending on what purpose the bond serves, meaning what the money gathered is used to fund) are not tax exempt.
All forms of municipal securities consist of short-term issues (typically referred to as notes) that contain a maturity schedule of one year or less and long-term municipal bond issues (typically known as bonds that contain a maturity period of more than one year). The short-term varieties are typically used by an issuer to raise money in anticipation of future revenues such as taxes, aid payments, while the issuance of long-term bonds is used, to cover irregular cash flows, to meet unexpected deficits and raise immediate capital needed for projects until a long-term source of financing can be secured.
Municipal bonds are issued by underlying agencies to finance the infrastructure needs of the issuing government body or municipality. That being said, the needs for each issuer will vary greatly; some municipalities use the revenues obtained from the municipal bonds to fund streets and highways, or hospitals, schools, power utilities, and other various public projects.