Municipal Bonds

Municipal Bonds

Different Types of  Bonds Include

Municipal bonds are categorized based on the source of its interest payments and principal repayments. A bond can be structured in different ways offering various benefits, risks and tax treatments. Income generated by a municipal bond may be taxable. For example, a municipality may issue a bond not qualified for federal tax exemption, resulting in the generated income being subject to federal taxes.

A general obligation bond (GO) is issued by governmental entities and not backed by revenue from a specific project, such as a toll road. Some GO bonds are backed by dedicated property taxes; others are payable from general funds.

A revenue bond secures principal and interest payments through the issuer or sales, fuel, hotel occupancy or other taxes. When a municipality is a conduit issuer of bonds, a third party covers interest and principal payments.

Risks

Default risk is low for municipal bonds when compared to corporate bonds. However, revenue bonds are more vulnerable to changes in consumer tastes or general economic downturns than GO. For example, a facility delivering water, treating sewage or providing other fundamental services has more dependable revenue than a park’s rentable shelter area.

As a fixed-income security, the market price of a municipal bond fluctuates with changes in interest rates: When interest rates rise, bond prices decline; when interest rates decline, bond prices rise. In addition, a bond with a longer maturity is more susceptible to interest rate changes than a bond with a shorter maturity, causing even greater changes in the municipal bond investor’s income. Furthermore, the majority of these are illiquid; an investor needing immediate cash has to sell other securities instead.



Social Icons

Call Rehab Hotline Toll Free