Municipal bonds are issued by local branches of governments, or related agencies such as: airports, public utility districts, school districts, or other government agency (which is under the state level). When a person purchases a municipal bond, they receive interest – which is usually exempt from federal income tax as well as exempt from income tax in the state which the bond was originally issued. Some municipal bonds, however, are not tax exempt.
The two most commonly used types of municipal bonds are revenue bonds and general obligation bonds. Revenue bonds are more secure, in that the interest on these bonds is paid by charges, tolls, or rents – which are obtained from the passing through or use of the facility which was built with the monies paid for the bond. These are usually public projects, such as bridges, hospitals, treatment facilities for water, sewage, and other public entities, and toll roads, as well as many others. These bonds are also usually created in order to fund the building of a project. General obligation bonds are purchased with faith in the credit of the branch or agency of government which issued the bond and on the power of taxing which this branch or agency holds. These types of bonds are usually approved by voters in local elections.
Many municipal bonds are given for a minimum of $5,000 or multiples of $5,000. It stands to reason that an investor that does not agree with the terms and conditions set in the statement; they should not purchase the bond. For those interested in more information about these types of bonds, there are also tools available for potential investors, such as the Electronic Municipal Market Access system. This system provides free information (available online), which can help investors understand how their money will be used and what the possible return on the investment could be.