If you've ever had a job with a terrible commute, you know that road construction is like glitter -- once it gets on a city, it's almost impossible to get rid of, and it shows up everywhere.
Roadwork, of course, is just one kind of public works project that costs the average city millions of dollars. Usually, cities don’t have that kind of coin lying around with nothing to do, so they borrow the. And one way to do that is to municipal bonds.
Municipal bonds give people like you the chance to lend money to cities and other municipalities. As the , you get one particular perk: The interest payments you'll receive are often exempt from , especially if you live in the municipality that issued the . Issuers know this, and that's why the interest rates on munis are usually lower than the interest rates on "regular" . That, in turn, encourages governments to undertake new projects.
General Obligation Bond
A general obligation bond ("GO ") is a municipal bond that finances a city's overall operations and public works. That is, the projects funded by the don't generate (such as parks or streetlights). Voters usually have to approve GO . GO usually have $1,000 or $5,000 face values and mature in five to 30 years. They typically pay interest semiannually, although some are zero-coupon .
Municipalities typically issue GO the same way any other is issued: through an that gives a written prospectus to buyers and facilitates a competitive bidding process. After municipal bonds begin trading, dealers across the country earn money by acting as intermediaries between buyers and sellers. Most people buy munis through a broker/dealer, but mutual are a common way to invest in general obligation bonds and other municipal bonds.
Municipal bond Municipal Securities Rulemaking Board (MSRB), which the SEC oversees, regulates general obligation bond underwriters and dealers.trusts (MITs) are another way to invest in a basket of municipal bonds. The
General obligation bonds don’t have collateral; instead, they are backed by the full faith and of the issuer. The municipality repays you from its collection of property , , tolls, property , license fees and other (or other ). Theoretically, the municipality has unlimited taxing power and thus should never default on the , but because it can't print (like the U.S. Treasury does), is a real possibility.
Revenue bonds are municipal bonds that revenue. Toll roads are great examples -- the tolls from the toll road the interest and payments. If the toll revenue is insufficient, however, the issuer might not be able to make the payments.specific projects that generate
Revenue bonds usually have $1,000 or $5,000 face values and pay interest semiannually, although some are zero-coupon catastrophe call provisions, which allow the issuer to the if the revenue-producing is destroyed. For all these reasons, revenue bonds typically more than general obligation bonds because they carry added risks.. Typical are one to 30 years. If you own one, you usually don't have a claim to the project’s assets (i.e., you can't repossess the toll road if the payments are late). Revenue bonds may also have
If you've ever gotten into a heated argument in a bar about whether the Raiders or the Chargers should move to L.A. and what a jerk the mayor is for wanting to/not wanting to pay for a new stadium, then congratulations, you're honing your debate skills about public-purpose .
A public-purpose funds projects that benefit the general public rather than private groups or individuals. Determining what "benefits the general public" is controversial, but the rules of thumb often fall around whether private entities receive more than 10% of the proceeds and whether the project has broad social value.is a municipal bond that
The Tax Reform Act of 1986 created distinctions between public-purpose and private-purpose bonds in an effort to limit the tremendous temptation municipalities face to act as banks for private entities with projects that lack substantial social benefit. The act, which made private-purpose bonds taxable, quelled much of this temptation. Today, there are many kinds of public-purpose (i.e., general obligation bonds, revenue bonds), but overall, these fund projects such as roads, libraries and infrastructure rather than football stadiums.
The debt). on municipal bonds are taxable, however.Answer: One of the largest advantages of in municipal bonds is that the interest is usually exempt from federal, state and local (especially if the investor lives in the state or municipality issuing the
For the most part, though, investors in high taxable bonds, and it's also why there is usually stronger demand for municipal bonds in high-tax states. Beware, though: legislation or even rumors about legislation can dramatically affect the value of munis. And as with all , muni prices rise when interest rates fall, and fall when interest rates rise.brackets can save a bundle by buying municipal bonds instead of "regular" . This is why municipal bond issuers get away with that have lower yields than