Municipal bond types, tax-exempt status, and credit rating concepts for everyday investors.
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- What is a municipal bond?
- A debt security issued by a state or local government to finance public projects.
- Why are municipal bonds attractive to many investors?
- Interest payments are typically exempt from federal (and sometimes state and local) income tax.
- Which governments can issue municipal bonds?
- States, cities, counties, and other local government agencies.
- What are the two main types of municipal bonds?
- General Obligation (GO) bonds and Revenue bonds.
- What is a General Obligation (GO) bond?
- A municipal bond backed by the full faith and credit of the issuing government, pledging its taxing power.
- What is a Revenue bond?
- A municipal bond repaid from revenue generated by the specific project it finances.
- Name three common types of Revenue bonds.
- Water and sewer, toll roads, and electric utility or hospital bonds.
- What is a water and sewer bond?
- A Revenue bond financed by user fees charged to customers of the municipal water or sewer system.
- What is a toll road bond?
- A Revenue bond repaid from toll revenues collected from drivers using the road.
- What is a hospital bond?
- A Revenue bond issued to finance hospital construction or equipment, repaid from patient revenues.
- What is a school district bond?
- Usually a General Obligation bond issued to finance school construction, repaid from property tax revenue.
- Who are typical investors in municipal bonds?
- Individuals in high tax brackets, trusts, insurance companies, and institutional investors.
- Do all investors benefit equally from municipal bond tax exemption?
- No, those in higher tax brackets benefit more, while tax-exempt entities gain less benefit.
- What do credit rating agencies evaluate for municipal bonds?
- The issuer's ability to repay, economic conditions, management quality, and budget stability.
- Name the three major credit rating agencies.
- Standard & Poor's (S&P), Moody's Investors Service, and Fitch Ratings.