MUNICIPAL BONDS

Municipal bonds (nicknamed munis) are bonds issued by states, cities, counties and various districts to raise money to finance their operations or to pay for projects such as hospitals, schools, power plants, etc.

Individual investors purchase the majority of municipal bonds. These bonds are usually issued in $5,000 (par) denominations.

Most municipal bonds are free of federal income taxes on interest distributions. They are also free of state and local taxes in the state in which they are issued. These features make them hugely popular among small investors. Municipals are considered relatively safe from default.

There are two types of municipal bonds: general obligation and revenue.

General obligation bonds (GO bonds) are unsecured municipal bonds that finance municipal operations.

They have maturities of 10 years or more. The creditworthiness of the issuing city or state is the only "security" they provide. The municipal issuer repays the bonds with funds raised by taxes, fees or property sales.

Revenue bonds are municipal bonds secured by the revenue of projects they fund.

Such revenues include tolls, fees and lease payments. However, the issuer does not have to make interest payments to investors unless there is enough revenue generated.

Moving away from home, we will now discuss debts issued by our federal government.