Municipal Bonds For The Retail Investor

A municipal bond (muni), is a debt security issued by a state, municipality, county or municipal entity to finance its capital expenditures (including construction projects) or for general financing of that municipality. The size and scope of this market is impressive.

There are over 50,000 different issuers of municipal bonds, resulting in over 1 million different issues outstanding in the U.S. In fact, as of 2017, the total value of all municipal bonds was almost $4 trillion. Most municipal bonds are exempt from federal taxes as well as most state and local taxes, which can make them especially attractive to retail investors, particularly those in high-income tax brackets. 

Broadly speaking, there are two types of municipal bonds.

What Are the Two Types of Municipal Bonds?

  • General Obligations (GOs)
  • Revenue bonds (Revs)

What is the Difference Between General Obligation Bonds vs. Revenue Bonds

A general obligation bond (GO) is issued by a state or city and is not backed by revenue from any specific project. Instead, these bonds are backed by the general taxing authority of the municipality which can include, sales tax, property tax and income tax. Therefore, these bonds have multiple sources of revenue (predominantly taxes) backing the security.

By contrast, a revenue bond, (Rev) is a bond which is secured by the revenue generated by a specific project (such as toll roads, bridges, convention centers, stadiums). These bonds are like loans for projects where the bondholders will receive interest and their principal from the revenue generated when the project is completed.

Benefits of Investing in Municipal Bonds

What makes municipal bonds most attractive is the tax status on interest income received. Unlike corporate bonds which are fully taxable to the investor, municipal bonds offer the following tax advantages:

  • Interest Income from most municipal bonds is exempt from Federal Income Tax
  • If the bondholder resides in a state with a state income tax, the municipal bond income can be exempt from state income tax if issued within the buyer’s state of residency
  • If the investor resides in a city with city income tax, interest income can also be exempt from city income tax, also based on the bond buyers residency.
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Disclosure: I understand that Online Trading Academy instruction will prepare me to actively trade securities and/or other financial instruments for my own account at an appropriate financial firm ...

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