WHAT ARE MUNICIPAL BONDS?

Municipal bonds (nicknamed munis) are bonds issued by states, cities, counties and various districts.

They are used to raise money to finance operations or to pay for projects. The projects they finance include hospitals, schools, power plants, office buildings, airports, etc. Municipalities levy taxes as their first source of revenue. When they need more money (such as when they overspend), they may turn to issuing bonds as a way to raise extra money.

Individual investors purchase the majority of municipal bonds. These bonds are usually issued in $5,000 face-value denominations or multiples of $5,000. They mature in anywhere from one to fifty years. Like other bonds, they may also be bought at a discount. For example, an investor may buy a $5,000 bond for only $4,000. At maturity, he or she will receive the original $5,000.

Municipals are considered relatively safe from default despite some adverse notoriety in past years. After they have been issued, they can be sold to other investors on the secondary market through exchanges or on the over-the-counter market.

Although municipal bonds exist in a variety of forms, most investors know two main forms. We will cover them next.